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 5. Supply of health care and Future Development 6. Evaluation of the Current Health Care System 7. Conclusion
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:
§ Health Care Expenditures and Funding Resources
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)
Time-Series Data on Aggregate Demand for Health Care 2516.9 67493.5 21715.25 2.616 117390.2 3.346 2003 2410.5 62798.5 18903.64 2.402 105172.3 3.306 2002 2263.9 58927.4 16386.04 2.220 97314.8 3.333 2001 2283.0 54600.9 13395.23 2.009 89468.1 3.310 2000 2311.2 49722.7 11444.08 1.808 82067.5 3.297 1999 2085.5 46405.9 9875.95 1.619 78345.2 3.344 1998 2451.0 43579.4 8651.14 1.381 74462.6 3.371 1997 2542.0 40003.9 7407.99 1.124 67884.6 3.279 1996 2257.8 33635.0 6242.20 1.000 58478.1 3.028 1995 Quantity of health services Total consumption expenditure Govern-ment revenue Price index of healthcare GDP Consumer Price Index Year
§ 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.
Cross-section data on per capita health expenditure and total expenditure in 2002 201.72 116.49 90.73 74.88 57.57 Medicine and medical services 3500.08 2086.61 1645.04 1310.33 1006.35 Rural: Total expenditures 657.33 510.15 382.83 286.56 225.67 Medicine and medical services 8919.94 6939.95 5452.94 4205.97 3259.59 Urban: Total expenditures High income households Upper middle income households Middle income households Lower Middle income households Low income households
§ 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 :
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.
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).
Graduates and No. Doctors of No. of Change .06273 37 100.816 53.371 154.187 1905 2004 .04737 24 58.67 52.686 111.356 1868 2003 .15976 -256 3.324 60.000 79.500 1844 2002 .01861 24 10.738 59.314 62.638 2100 2001 .01411 31 1.428 58.429 59.857 2076 2000 .00778 46 4.431 57.114 61.545 2045 1999 .02387 14 4.665 56.714 61.379 1999 1998 61.239 1985 1997 Implied % of Retirement Actual Increase in No. Doctors Estimated Increase in No. Doctors Retirees (1/35 No. in year before) Number of Graduates 1000’s Number of Doctors 1000’s Year
§ 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.
§ 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 of increase of 0.049. This is substantially less than the increase in demand due to increase in real income.
§ Explanation of Rapid Increase of Health Expenditure
Taking the derivative of equation (3) with respect to time we have
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.
§ 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.
§ 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 ln p to and subtracting ln y from both sides of the equation (2) to yield:
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.
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.
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.
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.
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
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.