Purchasing health care in China: competing or non-competing third-party purchasers?

Presenter: Weiwei Xu, Erasmus University, Rotterdam

Abstract

Rationale: China’s government has decided to increase government funding by 1-1.5% of the Gross Domestic Products in the health care sector. However, it is still a question how to turn the new funding into efficient health care.

Objectives: The object of this paper is to deal with the question how to best spend the new money to tackle the problems concerning efficiency and equity.

Methodology: To help to answer this question we analyze three prototype models of organizing the health care system that may be relevant for China, namely the “government provision model”, the “regulated market with non-competing third-party purchasers”, and the “regulated market with competing third-party purchasers”. The pre- and post-reform English health care system and the present Dutch health care system are used as examples of the three models. During the last 20 years these countries had, just as China, major health care reforms from a national centrally planned system to a market-based system. Based on the experiences in these countries we analyze the advantages and disadvantages of these three prototype models and discuss their relevance for China.

Results: The "government provision model" has strong ability to contain costs, and can be organized with low administrative costs and relatively simple legislation. Major disadvantages of this model are fiscal pressure faced by the government and lack of incentives for efficiency, responsiveness, and accountability. The "regulated market with non-competing third-party purchasers" has potential to enhance efficiency and responsiveness in providing care. However, there is no consumer choice among purchasers. Therefore, purchasers generally lack incentives for stimulating efficient care provision and responsiveness. More complex regulation is needed in this model than the "government provision model". With the "regulated market with competing third-party purchasers", prudent purchasers are motivated by consumer choice. This creats incentives for efficiency, responsiveness, and innovation for both purchasers and providers. Major disadvantages include high transaction costs of contracting, complex regulation and potential for risk rating and/or risk selection.

Conclusions: There is no ideal model in the health care sector. The choice of a certain model requires a trade-off to be made by the policy-makers. Based on theory and on experiences of the two example countries, we conclude that the creation of powerful and prudent third-party purchasers, who have the incentive and ability to act on behalf of individual consumers, is a critical success factor, whatever model China chooses to implement.