CHINA'S HEALTHCARE REFORM/REBALANCING:

UNCLAS SECTION 01 OF 03 BEIJING 001097

SENSITIVE
SIPDIS

STATE PASS USTR FOR STRATFORD
TREASURY FOR OASIA

E.O. 12958: N/A
TAGS: ECON SOCI CH
SUBJECT: CHINA'S HEALTHCARE REFORM/REBALANCING:
PROGRESS, BUT WITH CAVEATS

Refs: A.
http://shs.ndrc.gov.cn/ygjd/ygwj/t20090408_27 1138.ht
m

B.
http://shs.ndrc.gov.cn/ygjd/ygwj/t20090408_27 1137.ht
m

C. Beijing 580

D. Beijing 693, Beijing 829, Hong Kong 421

E. Beijing 422, Beijing 359


1. (SBU) Summary: China's blueprint for healthcare
reform released on April 6 is being heavily promoted
by the official media but will take years to
implement and experts question whether it will
address fundamental problems in China's healthcare
system. The plan is unlikely to improve trust in
the healthcare system or to fundamentally change
savings and spending behavior, particularly in the
next few years. The overall scheme aims for
universal healthcare coverage by 2020. In the
initial 2009-2011 phase, China intends to invest RMB
850 billion ($124 billion) in five broad reform
areas: 1) basic healthcare insurance, 2) a national
essential medicines program, 3) improvement of the
rural health care service network, 4) elimination of
the gap between urban and rural healthcare, 5) and
continuation of public hospital pilot projects.
Implementation will be difficult, and because
Chinese will still be required to keep large
discretionary savings to pay for health care
contingencies, the plans are only a small first step
in the direction of rebalancing towards domestic
demand-driven economic growth. End Summary.

The Basic Blueprint
--------------


2. (U) On April 6, the Government of China released
a State Council "Opinion" on deepening healthcare
reform as well as implementing guidelines for 2009
to 2011 (see Refs A and B). Together the two
documents flesh out the Chinese Communist Party (CPC)
Central Committee and the State Council health care
system reform framework adopted on January 17, 2009,
as well as plans announced at the 17th National
People's Congress in March (See Ref C) to invest an
additional RMB 850 billion ($124 billion) over the
next three years. The Central Government will
invest RMB 331.8 billion and provincial and lower
governments will cover the rest.


3. (U) The Government's plan aims to repair China's
healthcare system and achieve universal access to
'basic' healthcare coverage by 2020. The
announcement on April 6 spells out five broad reform
areas: 1) basic healthcare insurance, 2) a national
essential medicines program, 3) improvement of the
rural health care service network, 4) elimination of
the gap between urban and rural healthcare, 5) and
continuation of public hospital pilot projects.


4. (U) Key features of the announced plan include
the following:

--(U) Government support for the construction of
2,000 county-level hospitals and thousands of urban
community clinics.

--(U) Training sessions for village and township
medical clinics and urban community medical centers.
Specifically, China hopes to train 360,000 health
care professionals for township health centers,
160,000 for urban community health institutions, and
1.37 million for village clinics in three years.

--(U) Coverage of 90 percent of rural and urban
residents with basic medical insurance by 2011. By
2010, subsidies to the Urban Residents' basic
medical insurance (URBMI) and the New Rural
Cooperative Medical Scheme (NCRMS) will be increased
to RMB 120 (US$17.60) per person per year. The
maximum amount payable by the Urban Employees' Basic
Medical Insurance (UEBMI) and URBMI will be
increased to six times the annual average salary of
local employees and disposable income of urban

BEIJING 00001097 002 OF 003


residents. The maximum amount of the NRCMS will be
increased to over six times per-capita net income of
local farmers. (Note: Given limited resources,
there is still a role for commercial insurance
providers to cover services not deemed 'basic' or
exceeding the maximum amount payable by UEBMI, URBMI,
and NRCMS. Commercial insurance products are not
part of the healthcare reform plan, and are mostly
tailored to employees of large state owned
enterprises and private companies, mostly in cities.
End Note.)

--(SBU) A list of national essential medicines will
be released in early 2009. The Implementation Plan
includes provisions to incorporate the role of
market forces in 'pushing forward mergers and
restructuring of pharmaceutical manufacturing and
distributing enterprises.' Additionally, according
to Dr. Li Yachan, the Deputy Division Director at
the Department of International Cooperation of the
State Administration of Traditional Chinese Medicine,
it appears that traditional medicine treatments will
comprise approximately 50 percent of the national
essential medicines list.

--(U)Increasing government regulation of medical
services and prescribing practices to avoid over-
prescription to fund hospital operations. The
Implementation Plan includes wording to increase
public disclosure of hospital budget, expenditure,
and revenue management information.

The Gaping Hole: Funding for Public Hospitals
--------------


5. (U) The Government's plan calls for continued
pilot projects to reform public hospitals. In the
key area of hospital funding, which underlies the
problem of relying on drug sales and expensive
diagnostic techniques, the plan calls for gradual
changes to service charges, drug sales, and fiscal
subsidies. The goal is to make service charges and
fiscal subsidies the primary channels for funding
public hospitals.


6. (SBU) This gradual approach, however, appears to
avoid an aggressive effort to attack the root of the
problem of hospitals and doctors using the sales of
prescription medication and expensive tests to make
up for budget and salary shortfalls. (Note: In a
web-poll conducted by sohu.com, 75 percent of the
2,183 doctors surveyed earned an annual salary of
less than 40,000 Yuan ($5,883). End Note.)

An Important Step, but with Challenges Ahead
--------------


7. (SBU) The official media is portraying the plan
as a historic move, and some local and international
experts express the need for effective
implementation. Hu Wu, a rural social safety net
expert at the Southwestern University of Finance and
Economics in Chengdu, told Econoff that despite his
reservations, the reform plan is still a good thing
for farmers. The number of rural families forced
into poverty due to illness may drop, according to
Hu, and with lower medical expenditures, they may
feel at least a little bit more secure.


8. (SBU) According to Hu, it will take time to set
up clinics in every village and equip rural
hospitals. It will take even longer, according to
Hu, to staff the facilities with qualified personnel
and then get the system fully functioning. Hu is
also concerned that implementation may encounter
wide-spread local corruption and resistance from the
medical care sector and pharmacy industry. He
worries about corruption and embezzlement of Central
Government funds used for the project. Similarly,
Peking University's Cai Hongbin expressed concern
about the overall corruption of the existing
healthcare and reimbursement system. At the request
of the Ministry of Health, Peking University has
assembled teams to study ways to mitigate corruption
and embezzlement.

BEIJING 00001097 003 OF 003



The Health Plan, Rural Consumption, and Rebalancing
-------------- --------------


9. (U) In the official media Chinese academics argue
that increased healthcare expenditures under the
plan will help reduce precautionary savings, thus
increasing domestic consumption, helping to
rebalance the economy to rely less on exports and
investment. Official media reports that the plan
will help reverse the trend in who bears the burden
of medical costs, in which the share of personal
spending on medical services has doubled from 21.2
percent in 1980 to 45.2 percent in 2007, while
Chinese Government funding has dropped from 36.2
percent in 1980 to 20.3 percent. (Note: This data
is based on official records. Because many doctors
and hospital fees are paid covertly in 'red
envelopes' (gratuities) directly by the patient, the
proportion of private medical expenditures are
likely even greater. End Note.)


10. (SBU) Hu told Econoff that the Government's
health-care reform plan, even when thoroughly
implemented, will NOT prompt farmers to consume more,
particularly in the near future (see Ref D). Hu
surmised that the Government's reform plans, if well
carried out, may make farmers less worried when
seeking medical care for common illnesses, but care
for serious or catastrophic illnesses will still
require an expensive trip to county/municipal-level
hospitals. (Comment: It is also common in China to
seek treatment and care from the most renowned or
'famous' doctors and hospitals even if adequate care
can be obtained at a local clinic for substantially
lower cost. Establishing public trust in the
community clinics after they are built and staffed
will therefore remain a challenge. End Comment.) Hu
said this will still force rural residents to pay a
lot out of their own pocket.


11. (U) Further, although starting in 2010 the
Government will raise annual subsidies for rural and
urban residents to RMB 120, the insured still will
have out-of-pocket expenses that might leave
patients without appropriate coverage. Most
patients will also quickly hit the upper limit for
reimbursements. For farmers, especially those in
poor areas with serious illnesses, the affordability
gap will therefore remain large. Hu said rural
families are also burdened with costs for old-age
care and the lack of a rural pension system.
(Comment: Because the healthcare reform plan will
only partially address the lack of trust in the
rural healthcare system and other aspects of the
social safety net remain weak, any increase in rural
consumption will be small due to the need to
maintain high precautionary savings. End Comment.)

Comment: The Devil is In the Implementation Details
-------------- --------------


12. (SBU) China's healthcare has suffered from
reduced Government funding during the last 30 years
of market reforms. The Government plans released
April 6 follow years of failed efforts to fix the
system, as well as intense debate and repeated
revisions to the current plan over the previous few
years.


13. (SBU) Difficulty implementing institutional
reforms in rural China is particularly challenging
(Ref E). Constructing rural healthcare facilities,
like other infrastructure and construction projects,
poses less of a challenge than the more important
task of staffing these facilities with qualified
personnel and building a transparent, corruption-
free system with appropriate incentives and salaries.
Local governments are also expected to cover over
half of the costs of implementing the plan, but lack
of funding and weak institutional capacity at the
local level may present a significant barrier to
successful implementation.

PICCUTA