Microsoft Word EcRefChina Oct06. doc

distribution
of such services among population groups, with a concentration of health 
resources to large and medium-sized cities, receiving about 80 percent of the total 
resources (UNDP 2000, p. 3), which cannot possibly reflect the regional distribution of 
the need for health-care resources. Naturally, the uneven distribution of health services 
may also depend on differences of competence across local areas in the field of health 
care organization.
Another country-specific inefficiency in China is related to strict price controls on specific 
types of health services. This has induced hospitals and health clinics to finance much of 
their health-care provisions by revenues from the sale of drugs. This, in turn, has created 
strong incentives both to charge high prices for drugs and to over-prescribe drug 
medication (Hesketh and Zhu, 1997).
146
Clearly, efficiency considerations require a new 
price system for health services with a more symmetric price system for drugs relative to 
other types of treatment. 
 
Indeed, reforms are underway in health care, including announced ambitions to improve 
the situation in rural areas,
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although China has a particularly long way to go in these 
areas.
148
As in the case of pensions, the financing of future health-care insurance in urban 
areas is supposed to rely on a combination of paygo and funding (with individual 
accounts), the latter organized along lines similar to Singapore and Malaysia.
149
Presumably, individual accounts are particularly useful for relatively inexpensive, mainly 
“out-patient” treatment, rather than expensive hospital treatment. Costly treatment 
(including “catastrophic health care”) is supposed to be covered by the paygo 
(redistributive) part of the system. However, the individual accounts already seem to have 
run into financial difficulties (in a similar way as the pension system), thereby forcing the 
government to inject new money from the general budget into the paygo part of the 
(preventive health care) in spite of the fact that such treatment is particularly important in poor countries 
(UNDP, 2005, p. 58).
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As much as half of the total spending on health care is reported to consist of costs for drugs, while 
more normal figures in developed countries usually are 10-15 percent (Blumenthal and Hsiao, 2005). 
147
See, for instance, China’s Social Security White Paper, 2004.
148
By the end of 2003, about 110 million individuals in urban areas, comprising 80 million employees 
and 30 million retirees, were reported to have been covered by health insurance, while the coverage in 
rural areas was still extremely low. 
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The individual’s entire contribution (two percent of the earnings) and a third of the contribution 
covered by the employer (six percent of the wage bill) are supposed to be paid into an individual’s 
(funded) personal account, while the remaining two thirds of the employers’ premium is allotted to the 
paygo part of the system (i.e., the common “health insurance pool”). See, for instance, Social Insurance 
Research Team (2003). 

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system.
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The state also encourages enterprises to establish supplementary medical 
insurance for their employees, mainly to settle medical expenses not covered by 
mandatory medical insurance.
How, then, should well-known trade-offs in health care be addressed? In the case of poor 
countries, both ethical and efficiency concerns make a case for emphasizing preventive 
health services 
and
basic curative health services rather than sophisticated (specialized) 
curative health care. 
(
Rich individuals may, of course, pay for sophisticated health care 
abroad, which would hardly create any impediments for the rest of the population in 
China.) Whereas preventive health care in developed countries is mainly an issue of 
individuals’ life style (smoking habits, diet, exercise etc.), in poor countries it is perhaps 
mainly an issue of sufficient nutrition, sanitation and effort to combat infectious diseases 
– areas where China has been quite successful. Indeed, the deficiencies in curative health 
care in China have not prevented a gradual improvement in broad health indicators in 
China, such as higher life expectancy. Perhaps health care has stronger effects on the