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An Economic Analysis of Health Care in China

An Economic Analysis of Health Care in China . Gregory C Chow Princeton University June 8, 2006. Outline. 1. Introduction 2. Changes in Health Care System 3. Demand Functions for Health Care 4. Government’s Program for Health Care

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An Economic Analysis of Health Care in China

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  1. An Economic Analysis of Health Care in China Gregory C Chow Princeton University June 8, 2006

  2. Outline 1. Introduction 2. Changes in Health Care System 3. Demand Functions for Health Care 4. Government’s Program for Health Care 5. Supply of health care and Future Development 6. Evaluation of the Current Health Care System 7. Conclusion

  3. 2. Changes in Health Care System §Institutions before 1980’s • A cost-effective three-tear health care system improved the health of the Chinese people: .reduction of diseases .decline in the annual death rate 17 per 1000 population in 1952→6.34 per 1000 in 1980 .increase in life expectancy early 1950s: 40.8 years→ early 1960s: 49.5 years → late 1970s: 65.3 years

  4. §Institutions since 1980’s • Rural: .Privatization of farming led essentially to the abandonment of public health provided by the government. • Urban: .Privatization of state-owned enterprises was a very slow process that took over two decades. .The government tried to provide a substitute for the public provision of health care through the state-owned enterprises.

  5. §Health Care Expenditures and Funding Resources

  6. §Health Care Expenditures and Funding Resources

  7. 3.Demand Functions for Health Care§Estimation Using Time Series Data • The amount of health care services measured in 1995 prices q = health care expenditure /relative price index of health care service table • Regression of lnq on lny and lnp based on the 9 annual observations from 1995 to 2003 yields: lnq =1.194(.382) lny–0.730(.241) lnp–4.831(4.027) R2/s = 0.620/.0447----- (1) next

  8. Time-Series Data on Aggregate Demand for Health Care

  9. §Estimating Income Elasticity with Cross-section Data • Regressing the log of medical expenditure per capita on the log of total expenditure per capita yields table: total expenditure elasticity se Adj-R2 Urban 1.080 0.023 0.9981 Rural 1.003 0.023 0.9980 • Corresponding data for 2003 yield similar total expenditure elasticities. next

  10. Cross-section data on per capita health expenditure and total expenditure in 2002

  11. §Price Elasticity by Combining Cross-section and Time Series Data • Take an average of 1.080 and 1.003 or 1.042 as our estimate of income elasticity of demand for health care, which is close to the estimate based on time series data alone as reported in equation (1) • Use time series data to estimate the price elasticity : (lnq -1.042 lny) = -0.636 (.047) lnp - 3.228 (.033) R2/s = 0.9637/.04192 ----(2) • Price elasticity is 0.636

  12. §Income Eelasticity by Provincial Data for Urban and Rural Residents • Adding lnp to both sides of equation (1) yields ln(pq) = c + a lny + (1- b) ln p + e ---- (3) • If the lnp on the right-hand side of (3) is uncorrelated with lny , using provincial data on health care expenditure from CSY 2005, we have: Urban: ln(pq) = -2.237(1.415) + 0.919(0.154) lny R2 =0.5501 Rural: ln(pq) = -4.434(1.299) + 1.162(0.163) lny R2 =0.6379 • The average of the above two income elasticities is (0.919 + 1.162)/2=1.041.

  13. §Inequality in Health Care Spending from Regression Analysis • s(lnpq) = (a/R)s(lny) • For urban residents across provinces, the factor a/R equals 0.919/0.742 or 1.239. For rural residents it is 1.162/0.799 or 1.454.(in 2004) • Inequality in medical expenditure is larger than inequality in income across provinces for both urban and rural residents. • The ratio of inequality for rural residents is higher partly because the rural residents have a higher income elasticity of demand for medical expenditure.

  14. 4.Government’s Program for Health Care§On Demand Side • "Decision on Health Reform and Development by the Central Party Committee and State Council." (January 15, 1997) • Basic objective : to insure that every Chinese will have access to basic health protection. • Rural : to develop and improve CMS through education, by mobilizing more farmers to participate and gradually expanding its coverage; 40 yuan subsidy per account. • Urban：a basic medical insurance system was established in 1998, financed by 6％of the wage bill of employing units and 2％ of the personal wages.

  15. §On Supply Side • In 2004 the government is in the process of allowing some hospitals in urban and rural areas to be run privately to reduce the burden to the government.

  16. 5. Supply of Health care and Prospects for Future Development§Constant Supply • The amount of health care supplied remained approximately constant between 1989 and 2003(as with the quantity q in Table 2).

  17. §Shift of Health Resources from Rural to Urban Population • In 2001 the number of health clinics in villages and townships was reduced by 1139; the number of doctors and health care personnel was reduced by 30,000. • From 1990 to 2000, government spending in total health care spending in rural areas was reduced from 12.5 percent to 6.6 percent. • The shifts in relative demand in favor of urban residents who could afford to pay and received more government funding for medical care resulted in the shifts of supply to the urban residents at the expense of rural residents.

  18. §Forecast of Rate of Increase in the Supply of Doctors • Assuming the number of doctors in the next few years to be 2400 thousand (with 160 thousand graduates per year, and number of graduates to be 200 thousand per year. • The number retired will be 2400/35 = 68.57 thousand, resulting in a net increase of 200 – 68.57 = 131.43 thousand, or a rate of increase of 131.43/2400 = 0.05476. • After subtracting annual population increase of 0.006 we obtain a rate ofincrease of 0.049. This is substantially less than the increase in demand due to increase in real income.

  19. §Explanation of Rapid Increase of Health Expenditure • Taking the derivative of equation (3) with respect to time we have dln(pq)/dt = 1.042 dlny/dt + (1-0.636)dlnp/dt ---- (4) where, dlny/dt = (ln 35083.7- ln19312.4)/8 = 0.0746 dlnp/dt = (ln1 - ln 2.36738)/8 = 0.1077. • The sum of the income effect 1.042(0.0746) = 0.0777 and the price effect (1–0.636)(0.1077) = 0.0392, yields a total of 0.117 for the exponential rate of increase in medical expenditure per year.

  20. §Estimate Rate of Increase in Price and in Expenditure • By assuming the exponential rate of growth for real GDP to be 0.08 and rate of growth in the quantity supplied is zero, solving the equation 1.082(0.08) – 0.646 x =0 yields a rate of increase in the relative price of health care equal to 0.134 ( about as large as the average annual rate of increase in the period 1995-2003). • If the rate of increase of medical supply is 0.049 per year, the rate of increase in price will be 0.058, instead of 0.134.

  21. §Explanation of Increase in the Ratio of pq to GDP • As a fraction of GDP health care expenditure increased from 3.86%in 1995 to 5.61% in 2003. • Adding lnp to and subtracting lny from both sides of the equation (2) to yield: ln(pq/y) = 0.042 lny + 0.364 lnp – - 3.228 ----(5) • The expenditure for health care as a ratio of income or GDP increases as a result of the income term if income elasticity is larger than unity. This effect is very small. • The ratio increases due to the second or price term in the demand equation if price elasticity is less than unity.

  22. 6.Evaluations of the Current System－ Unequal Treatment of Urban and Rural Population • Urban: the government has assisted the working population in the transformation to the current system of insurance financed. Urban: medical care is mostly publicly supplied • Rural: services privately supplied and market determined. Government has encouraged and assisted the rural population to organized CMS as a collective medical care system, covering about 100 million/800 million rural population, but in 2006 it has introduced a government subsidy of 40 yuan per person with 10 yuan contributed by rural resident; fund will be pooled to pay for medical expenses.

  23. Why effect of government subsidy on demand for rural healthcare limited • 1. government subsidy of 40 yuan per person may be substantial as compared with existing healthcare spending per capita but it will not increase total demand substantially because it is a substitute for private spending. • 2. the relative demand of rural and urban population for healthcare will not be affected substantially. Because of the more rapid rate of increase in urban income per capita the relative force of demand will shift in favor of the urban population.

  24. Government subsidy and provision for healthcare to rural residents can increase welfare substantially • if government spending is used to (1) pay for medical insurance (a) to cover only the major illnesses of the rural population, or (b) to insure the rural population with below median income, or (2) to operate clinics almost free of charge, the effect on rural healthcare can be improved substantially. • A government program of social insurance or healthcare provision can have an important effect because many rural residents may not voluntarily buy such an insurance as they pay for medical expenses only when they are seriously ill and when it is often too late. In some villages clinics are not available and farmers cannot get healthcare even if they are willing to pay for it.

  25. Possible improvement in the Management of Health Care • Medical insurance only to pay for large expenses. No insurance or high co-payment for small expenses • Incentive payment for physicians in public hospitals • Leasing of public hospitals for private management given same subsidy • Encouragement of private hospitals

  26. 7. Conclusions • We have estimated an income elasticity of demand for health services to be unity for urban population and slightly above unity for rural population, and a price elasticity of about 0.6 by combining cross-section and time-series data. • Demand analysis can explain the increase in expenditure on healthcare and the increase in price as income increases given limited supply. It also explains the increase in the ratio of health expenditure to GDP. • There is large inequality in health expenditure per capita between the urban and the rural population associated with income inequality. • Rapid increase in income and government support account for much better healthcare for the urban population. • A market economy in rural China fails to provide as much health care as under the former collectively managed and collectively paid system. The government is attempting to reintroduce features of this system, with results yet uncertain.

  27. THANK YOU

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