2. Medicare System

The Medical Insurance System in Japan
Miho Sekimoto∗ and Masako Ii∗∗

I. Characteristics of the medical insurance system in JapanCountries around the world are anxiously searching for better medical systems. The
construction of medical systems has followed different routes in the various countries of the world,
influenced by the different cultures, histories, and ideas of each country. A distinction that isparticularly vital when constructing a medical system is whether medical care is considered to bea merit good (a good that everyone should receive) or is considered to be a general resource whichshould be allocated depending on the ability of the users to pay for it. Since 1961 Japan’s medical
insurance system has been predicated on the first of these two approaches.
National experience shows that when a health system works well, it produces good results.
Japan, for example, has achieved the world’s highest health standards, with extremely low infantmortality rates and very long average life expectancy. These achievements are partly due toJapan’s well-functioning health system.
Looking at the situation around the world, medical systems are divided into three groups.
The first group is “The United States.” The United States has constructed its medical system using
the approach of “relying on the market principle based on personal responsibility.” Medical carein the United States is entirely private and with a few exceptions they use private sector insurance
rather than a public insurance system for medical insurance. A large number of insurancecompanies are offering a wide range of insurance products. However, some of the citizens do nothave enough income to pay the insurance premiums and approximately 40% of the population isuninsured.
The second group is “Northern European countries such as Norway, Sweden, Denmark, etc.,
and the United Kingdom.” In these countries, all of the public are guaranteed medical care, which
is funded by taxation. Furthermore, the public sector provides the medical care. However, in
day-to-day life commodity prices are high and taxes are also high. The consumption tax is as highas 25%. In Northern Europe the medical services that are provided are limited compared to Japan.
The citizens are paying over 70% of their income in taxes, but the national government takes careof all living costs in old age, medical care, living costs for disabled persons, and education.
The third group is “Europe, Germany, France, etc.” where the medical insurance system is apart of social security. The amount paid by the patients themselves is low, with most of the cost∗

Miho Sekimoto (M.D., Ph. D., M.P.H) is a research fellow at University of Tokyo Graduate School of Public
Policy. Her research focuses on quality of health care and medical resource allocations.
∗∗
Masako Ii is Professor of Economics at School of International and Public Policy, Hitotsubashi University.
Her fields of specialization are health economics, public economics and development economics.

85

covered by medical insurance, as a part of social security. In France the proportion of medical
costs paid by the patients themselves is approximately 5%. Japan’s social insurance system wasbuilt using Germany as the model, so Japan also belongs to this group. In Japan medical carefunding basically relies on the social insurance approach but medical care is mostly provided by
the private sector.
Japan’s medical system has the following characteristics (Ikegami, 1998). However, thesecharacteristics are not unique to Japan; many countries other than the United States have medical
systems that are similar in some respects.
1. De facto, nearly all of the citizens are forced to acquire medical insurance (universal healthinsurance coverage)
2. The insurance is acquired automatically and neither the insured person nor the insurer has
much freedom of choice regarding the scope of coverage of the insurance
3. Nearly all of general medical care is included in the welfare program
4. Insurance premium burdens are calculated based on the income of the insured person
5. Disparities in the burden among different social groups are alleviated throughcross-subsidization between the general account burden and the insurance plans
6. Nearly all prices of medical care are strictly controlled by a medical fee schedule
7. The Medical Treatment Fees Table is decided through regular negotiations between the payers
and the providers of the treatment
8. Research costs with no direct relationship to medical care and the administrative costs of theinsurers and the medical care professionals are kept low.
All of Japan’s medical insurance is mainly public insurance, and is comprised of two
components: National Health Insurance (NHI) and employee health insurance. Employee healthinsurance is medical insurance that companies set up for their employees. On the other hand,
National Health Insurance is insurance for people who are not covered by employee healthinsurance. Japan built a system of universal health insurance between 1960 and 1963. In otherwords, all Japanese people and all foreign nationals who have lived in Japan for a year or more
and wish to acquire insurance can acquire health insurance.
We can say that the universal health insurance system transformed the nature of the medical
insurance system that had existed until that time (Shimazaki, 2005). Under the former National
Health Insurance Act, establishment of national health insurance associations, the operators of thesystem, was voluntary; moreover participation in the national health insurance was also voluntary
on a household-by-household basis. Furthermore, the associations were allowed wide-ranging
autonomy and discretion, and the determination of people ineligible for insurance, benefit rates,
and the amount of medical costs paid by the patients themselves was also left to the associations.
Considering that the associations were organized and operated based on the ideas of theassociation members in this way, the former National Health Insurance Act was close to thethinking of the “insurance principle” of “benefits based on the size of the contribution.” On the86other hand, the new National Health Insurance Act was established based on the philosophy ofrealizing universal health insurance, and took the approach of compulsory insurance publicly run
by municipalities. As a result of this, the insurance principle possessed by the former national
health insurance was watered down. In other words, the autonomy and discretion of the insurers
was lost because all citizens were forced to acquire insurance whether they wanted to or not andregardless of their ability to pay the insurance premiums.
The year 1973 is known as “the first year of the welfare era” in which the High-cost
Medical Care Benefit system was created. Furthermore, at the same time the ratio of medical costs
paid by the patients themselves was reduced from 50% to 30%, and medical care for the elderly
was made free. The High-cost Medical Care Benefit system is a mechanism under which theindividual patient initially pays the full costs but if the amount of medical costs paid by the patient
exceeds a fixed amount the patient can be refunded the excess amount from health insurance ifthey apply for it. Thanks to the High-cost Medical Care Benefit system, the general ratio of
medical costs paid by the patients themselves is 30% but on average it is actually just 15%.
II. History of Universal National Health Insurance in Japan¾

Realization of the Health Insurance Law
In 1922, the Ministry of Home Affairs promulgated the Health Insurance Law– Japan’s firstsocial insurance legislation. The law was designed to protect workers at factories or mines withfifteen or more employees. It was also designed to create cooperation and harmony between
capital and labor, and was new legislation modeled after the sickness insurance systems ofGermany and other countries. As Shimazaki (2005) pointed out, the Health Insurance Law
contributed greatly to the successful enactment of the National Health Insurance Law that targeted
farmers who normally do not adapt to social insurance, and this played an important role in theestablishment of the later public health system in Japan.
Workers at small-scale factories with less than fifteen employees, government officials,bank employees, and a few others such as farmers and the self-employed were not covered by the
Health Insurance Law. There were some arguments regarding the treatment of the then-existing
mutual aid associations. Eventually, it was decided that only mutual aid associations for public
servants were exempted from application of the law, and private organizations were not allowed tocontinue the operation of their health insurance programs. This meant that health insurance
programs were no longer managed by autonomous private organizations and the government wascompelled to become the insurer.
When the Health Insurance Law was first established, the insurers could directly negotiate acontract with physicians. Each insurer could freely determine the unit price and the calculation
method used to pay the physicians’ service fees in the contract with medical institutions. The
Health Insurance Law covered only the insured’s illnesses, injuries, death, and childbirth incurredboth on and off the job but did not cover disabilities of aged people. There were various

87restrictions on medical benefits. In principle, the insured were not allowed to change their doctor
when being treated for the same disease, and changing to another doctor required an approval
from the insurer. Cash benefits included disability allowances, funeral rite benefits, childbirth
expenses, and maternity allowances.
The cost of operating health insurance was defrayed by the premiums paid by employees
and employers as well as by the contributions from the Japanese government. The government
paid 10% of the insurance benefit, which is approximately same as the administrative cost.
¾

Maintenance of the Health Insurance System: Rapid Expansion during the War
In the 1920s and the 1930s, farmers suffered from severe poverty caused by economic

depression and natural disasters. Medical expenses were a tremendous burden on poor farming
villages, so they were unable to see a doctor. Since those farming villages were a source ofrecruitment for the military, a decline in the physical strength of farmers and peasants stirred aconcern from a national defense point of view. In 1934, the government announced a draft outlineof the national health insurance system, in which an association would be formed in eachmunicipality, and health insurance would be administered with the association serving as aninsurer.
The most important issue in the implementation of the National Health Insurance Law was
who would be the insurer – in other words, the chief operator of the system. The issue wasresolved by having the municipalities form the National Health Insurance Associations andmaking them the insurers. The establishment of an association was voluntary, and participation in
the association was also voluntary. The association had autonomous and discretionary powers, andbenefit rates and some of the co-payment amounts were determined by each association. There
was a contractual relationship between an association and its insured. One of the reasons why amunicipality-based association was adopted was that many people in rural areas already had asense of community through irrigation and rice farming activities in each village, and a strong
sense of community and mutual assistance existed. Many rural areas traditionally had mutual
financing associations as well, and the National Health Insurance system reflected these social
realities (Shimazaki 2005).
After experiencing many difficulties, the law was enacted in 1938. While the Health
Insurance Law was applicable to somewhere between two and three million factory workers, theNational Health Insurance Law applied to several tens of millions, which was about 60% of thetotal population (an unprecedented number, globally). This was the first time that Japan unified all
aspects of the administration of public health and medical services under a single authority (JICA
2005).
The old National Health Insurance Law enacted in 1938 was closer to insurance in its basic
sense than the new National Health Insurance Law enacted in 1958. It is significant that healthinsurance in Japan became more than labor insurance. As a result, the insurance was also extended
to the general public.

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¾

Consolidation of various health insurance laws and the First Universal Insurance
In 1939, the Employees’ Health Insurance was inaugurated. Unlike the Health Insurance

Law, which was only applicable to laborers at factories, this insurance covered office workers as
well. Under this system, the insured bore a partial out-of-pocket contribution. Ordinances
concerning government employees’ mutual aid associations and school personnel mutual aid
associations were also enacted since they were excluded from the Health Insurance Law.
In 1939, the Health Insurance Law was amended to, for example, provide dependents’
benefits and extend the payment period of medical expense for tuberculosis. In 1942, the Health
Insurance Law and the Employees’ Health Insurance Law were integrated. In order to prevent
unnecessarily frequent visits of doctors, the out-of-pocket contribution system was fully
introduced. It was decided that remunerations for medical services would be paid directly fromthe Health and Welfare Ministry to doctors according to a medical fee table devised by the
Ministry. Physicians’ fees were determined by the unit price and a point system which were usedboth for the employees’ insurance and the National Health Insurance.
At that time, only half of the physicians in Japan wanted to become health insurance doctors.
An unreasonable calculation method resulted in low unit prices as the number of patients
increased; the method was subsequently corrected and the requests of the JMA were accepted
under the wartime regulations. The health insurance system managed by the government at thattime had a large surplus in its fund, and the government wanted to use the surplus in order tomake the insurance more popular. This is how the fee-for-service system without the maximum
total service fee was created, and this system basically still remains in effect today.
The amendment in 1942 introduced a mandatory designation system administered by theprefectural governors. On behalf of the insurers, the government, without consulting others,
appointed healthcare providers that were common to all insurers (employees’ insurances, theNational Health Insurance, seaman’s insurance), and physicians could not refuse without
legitimate reason. The purpose was to control health insurance doctors in order to ensure theircooperation with the "healthy people - stronger soldiers policy" during wartime. The insurers'
right to select health insurance doctors was ceased, and the system of appointing insurance
doctors by the government still remains in effect today (Fukuda 2003).
In 1942, the National Health Insurance Law was amended. The most important amendment
was the one that made it possible for provincial governors to force municipalities to establish anational health insurance association, whereas the establishment of an association had, until then,been optional. The General National Health Insurance Association was established in 95% of themunicipalities by 1942 or 1943. This can be seen as the accomplishment of the first universal
insurance (Yoshihara and Wada 1999); however, some of the municipal associations were createdfor number-crunching, and the reality was far from universal coverage.
The integration of the Health Insurance Law and the Employees’ Health Insurance Law, as
well as the amendment of the National Health Insurance Law, represented a milestone reform: this89

was the first instance of consolidating the social health insurance systems within a country; theidea of a universal health insurance system was explicitly spelled out; an out-of-pocket
contribution system was partially introduced; health insurance doctors were forcibly designated;
and the government was given a great amount of power over the operation of the system. These
amendments provided a basic framework for the current health insurance system in Japan.
With the exception of pension schemes for the farming population and the self-employed, asocial insurance system that covered almost all citizens was completed during WWII. Althoughmost of the social insurance systems were on the verge of breaking down toward the end of thewar, these systems survived and were reconstructed when many of the pre-war institutions andlaws were being abolished. It can truly be said that Japan’s social insurance systems were a legacy
that was created and fostered by recessions and wars during the early 20th century.
¾

Postwar Health Insurance System: From the Reorganization after the War to theEstablishment of a Universal Insurance
By the end of WWII, 98% of all towns and villages and 63% of the cities, other than the six

major metropolitan cities had established a national health insurance association, covering overforty million persons. In the immediate postwar years, however, the majority of these associations
were either poorly operated or dormant. Doctors did not treat health-insurance-covered patientskindly since the system remunerated the doctors poorly. They grew increasingly discriminative
against and distrustful of health insurance, sentiments which they had held since the pre-war days.
During the several years following the end of WWII, as related laws were amended, themedical fee schedule was revised and the level of fees was increased, a medical fee payment fundwas established, health insurance hospitals were established, and the national health insurance
system gradually regained its original function and the confidence of the people.
A free appointment system (the government still appointed doctors, but with doctors'
agreement) was introduced in 1948, but the selection of doctors was still done by the government,
not the insurers (Fukuda 2003). When the Health Insurance Law first became effective, each
insurer could determine the rate of the insurance premium and benefits as well as the collection of
the premium, but the maximum amount of the premium has been regulated since 1948. The
National Health Insurance Law dictated that the insurers determined the premium when the law
was first enacted, but the amendment to the law in 1948 transferred the management
responsibility from national health associations to municipalities, and premiums came to be
determined administratively. The Health Insurance Law and the National Health Insurance Law
mandated the range and the level of the benefits. Insurance premiums and the delivery of thebenefits were regulated, and there was almost no room for each insurer to calculate the premiums
and benefits.
Other major changes that took place immediately after WWII were as follow. First, theLabor Union Law and subsequently the Labor Standards Law were enacted, and designatedindustrial diseases were excluded from the coverage of the Health Insurance Law and placed90under the jurisdiction of the Ministry of Labor which was established in 1947. Second, in 1948,
the National Health Insurance Law was amended to ensure that the NHI became the responsibilityof municipalities, with the aim of promoting NHI programs across the country. Because the
law’s clerical work was closely related to the daily business of municipalities, municipalities took
over the administration in principle. Moreover, not only the heads of the households but also allmembers of the households were required to be insured.
Forcibly insuring everyone regardless of his/her individual will or ability to pay thepremium and spreading understanding of the principle of insurance basically were mutually
exclusive. An amendment to the Local Tax Law in 1951 created the National Health InsuranceTax, and the method of collecting National Health Insurance premiums became the same as that ofmunicipal taxes. The purpose was to increase the collection rate, but approximately 90% of themunicipalities still choose the National Health Insurance Tax as the collection method, and people
lost their sense that the National Health Insurance is an insurance system. After the establishmentof the universal health insurance, as a group of insurance societies the National Health Insurance
system gradually lost its homogeneity as the significance of traditional local communities
declined over time.
In the mid-1950s, about one-third of the Japanese population, being largely engaged inagriculture and other self-owned businesses, was not covered by health insurance. Insured persons
amounted to approximately thirty million people, of which ten million low-income earners had nochoice but to go on social welfare once they became ill.
In 1953, the government finally introduced subsidies equivalent to 20% of medical carebenefits. This established the financial base of health insurance, and a foundation for the universal
insurance was laid.
A new National Health Insurance Law was enacted in December 1958, went into effect in
1959, and was enforced across the country in 1961. The National Pension Law was also enacted
in 1959. Universal health insurance and pension schemes were thus achieved in April 1961.
III. The deadlock in Japan’s medical insurance system and its causes
The steep rise in expenditure on medical care for the elderly began in 1973 when medicalcare for the elderly aged 70 years old or older was made free (Figure 1). From 1961 to 1978
medical costs grew at a double-digit rate every year, and from the time universal insurance wasachieved until the 1980s the medical insurance system struggled with a fiscal deficit. As ameasure to reduce the deficit the finance adjusting subsidies from the government were greatly
increased. In 1960 they were 15.7% but by 1980 they had greatly increased to 30%. Looking at
the sources of funds for national healthcare expenditure in fiscal year 2005, the portion paid by
patients accounted for 14.4%, insurance premiums accounted for 49.2%, and the portion paid outof public funds accounted for 36.4% of total expenditure.

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Figure 1. Annual changes in national medical expenditures(general medical expenditures) by age group
250 000

200 000

150 000

100 000

50 000

0
FY
1977

1985

1987

1989

0 to 14 years old

1991

1993

15 to 44 years old

1995

1997

1999

45 to 64 years old

2001

2003

2005

2007

65 years old or older

Along with the outbreak of the 1973 Yom Kippur War, the OPEC (Organization of thePetroleum Exporting Countries) member states announced an oil strategy involving cuts in crude
oil production, large increases in the price of crude oil, etc., which caused the first oil shock.
Japan’s economic growth rate declined from the 10% growth it had been enjoying previously to
the 5% level, and a period of rapid economic growth came to an end. Although medical costs rose
steeply from the middle of the 1950s until 1973 when the first oil shock occurred, Japan was able
to find a way to support the medical insurance system because of the rapid economic growth overthe long term and the resulting increase in tax revenues. However, subsequently socio-economic
conditions changed dramatically and the country came under pressure to review its social security
system. Specifically, these changes included the aging of the population, changes to the industrial
structure, and economic stagnation.
¾

Aging of the population
From before the war until about 1955 the population aging rate in Japan was approximately

5% and the population composition pyramid maintained a Mt. Fuji shape for a long period. In
other words, the productive-age population accounted for the majority of the population andsupported the relatively small number of senior citizens. However, from about 1950 the birthrate
rapidly declined and the death rate among middle-aged and older people declined as well so from1955 the aging of the population accelerated. The aging of the population was much faster inJapan than in Europe and North America. Furthermore, the first baby boomer generation after thewar (in Japan immediately after the Second World War, the generation born in the baby boom
from 1947 to 1949) are now about to join the elderly population in large numbers. These92

generations are now moving from the productive-age population to the population of seniorcitizens so the time has come when we have to think carefully about the balance between publicfunding (by national and local governments) and the individual burden.
¾

Changes in the industrial structure
Before the war the workforce was mostly employed in primary industries. In about 1940,

when the former National Health Insurance Act was established, nearly half of the workforce was
employed in primary industries, and even at the time universal insurance was achieved this figure
was approximately one-third. However, during the period of rapid economic growth a shift fromprimary industries to secondary and tertiary industries occurred, and the proportion of the
population working in primary industries rapidly fell, reaching a mere 10% in 1980. As a result,the proportion of national health insurance policy-holders who worked in agriculture, forestry or
fisheries rapidly declined, and the proportion of the unemployed rapidly increased. At the sametime, more elderly people got insurance and the proportion of households with no income
increased, and the size of national health insurance insurers rapidly shrank. For example, in 1965
only 5% of the elderly had insurance, the proportion of people who worked in agriculture, forestry
or fisheries was 42% and the proportion of unemployed was 6.4% but in fiscal year 2002 as manyas 26.6% of the elderly had insurance, the proportion of people who worked in agriculture,
forestry or fisheries was 5%, and the proportion of unemployed was 51%. As a result of this, it
can no longer be said that National Health Insurance is either “insurance for farmers” or“insurance for people who are working.” In other words, the population incurring medical costs is
now overwhelmingly greater than the population bearing the burden of the insurance premiums.
¾

Stagnation of the economy
After the first oil shock in 1973, Japan’s economy entered an era of low growth; moreover,from the second half of the 1980s when the economic bubble burst through to the end of the
1990s (‘the lost decade’), tax revenues stagnated. In the 1990s, the annual average rate of growthof national healthcare expenditure was 7.8% whereas the rate of growth of GDP averaged just
2.1% annually. During this time the government avoided raising taxes and poured money into
public works projects, local finance, and medical costs as an economic stimulus measure, greatly
increasing its debt. Due to the creation of the health insurance system for the elderly in 1983, thesteep rise in expenditure on medical care for the elderly was slowed down but minor amendments
to the laws were made nearly every year in order to ensure the stability of medical insurance
finances. A specific example of this is the mechanism under which the national government andthe local governments jointly provide assistance for the alleviation of the insurance premium
burden of low income people and for high medical costs. Furthermore, in 1997 an amendment to
the Health Insurance Act raised the proportion of medical costs paid by the patients themselves
under the employee health insurance system, increased the amount patients have to pay for
medicines, and raised insurance premiums, etc. However, despite these legal amendments medical

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insurance finances only continued to deteriorate.
IV. Measures to deal with the continuously increasing medical costs of the elderly: the healthsystem for the elderly
The steep rise in expenditure on medical care for the elderly began in 1973 when medicalcare for the elderly aged 70 years old or older was made free. Furthermore, after the war thecomposition of diseases changed, and demand for treatment of acute diseases, particularly theinfectious diseases which had been prevalent until that time, shifted to demand for care of chronic
diseases, primarily adult diseases (diseases associated with adult lifestyle habits). As a measure todeal with these diseases, it was decided to impose some of the financial burden for treatment on
the elderly as well. Furthermore, an attempt was made to ensure a fair burden on all citizens bysetting up a system in which the national government, the local governments, and companies
jointly contributed to medical care for the elderly. This was the essence of the Elderly Health Act
established in 1983. The most important feature of this system was that “the national government,
the local governments, and companies jointly contribute to medical care for the elderly,” anapproach which can be said to be a kind of finance adjusting.
However, what should be noted here is that the Act did not create a health system for theelderly under which the previous employee health insurance and National Health Insurance wereseparate; rather it made the health system for the elderly a joint scheme of the insurers (the local
governments, companies, the national government). In other words, it did not newly establish
places for the elderly to acquire insurance, but rather created a framework for how and by whom
the medical costs of elderly people aged 70 years old or older should be borne. The joint scheme
was funded from three sources: 1) the proportion of the medical costs paid by the patientsthemselves, 2) the contributions for the health of the elderly from each medical insurance system,and 3) public funding by the national government and the local governments. Medical costs otherthan those paid by the patients themselves were shared fifty-fifty between the contributions for thehealth of the elderly from each medical insurance system, and the public funding by local
governments. Furthermore, when deciding the contributions of the medical insurance system, theAct attempted a “transfer of money between insurers” caused by the differences in the percentageof the elderly with insurance, that is, a transfer from insurers with a low percentage of the elderlywith insurance (companies) to insurers with a high percentage (local governments). In other words,
the act provided a mechanism under which an insurer could receive a subsidy if it had a large
number of elderly policy-holders and conversely would have to make a contribution if it had alarge number of young policy-holders.
One-third of medical costs are medical care for the elderly and the question of who would
bear the financial burden for these costs became a major problem. It is strongly asserted that large
companies should bear the burden, but the national government and the large companies are
already paying contributions. According to the companies, they do not mind bearing the burden of94

the medical costs of their own employees but they cannot accept being forced to take over thepayment of the expanding medical costs of the elderly without limit. In 1999 health insurance
associations no longer able to cope with payment of the contributions encouraged a situation inwhich a non-payment campaign unfolded. The health insurance associations are insurance
established by the large companies for the current working generation. The government created a
new system, saying that it would work hard to ensure that the elderly medical costs portion did
not increase any more than it already had, and that it wanted the companies to pay the last part.
This was the Latter-Stage Elderly Healthcare System for elderly people aged 75 years old or older.
The major difference between this system and previous systems was that under the medical
system for the elderly in the Elderly Health Act, medical care for the elderly was applied evenwhile the person continued to be insured through other health insurance, etc., whereas under the
Latter-Stage Elderly Healthcare System independent insurance was created only for elderly people
aged 75 years old or older and it was decided to operate national health insurance integrated at theprefectural level, because elderly people have the highest medical costs. Furthermore, it was
decided that elderly people aged from 65 years old to 74 years old would acquire the same
insurance as under the previous system, bear the burden through finance adjusting among insurers,
and go to independent insurance from the age of 75.
It has been said that the major objective of this system was to use public funds to rescue
medical insurance for the elderly, which was de facto bankrupt (Saito 2008). For the current
elderly generation to continue receiving the medical benefits they have received in the past,annual insurance premiums of 72,000 yen (the nationwide average) are not nearly sufficient; it isnecessary to pay insurance premiums of the order of several hundreds of thousands of yen.
However, the latter-stage elderly generation has lower incomes than when they were working andsuffer from deteriorating health so it is impossible for them to contribute this amount in insurance
premiums every year. If they do not put aside money for the future in their working years either,and so cannot pay the insurance premiums, they cannot receive medical benefits, so it is fair tosay that medical insurance for the elderly is substantially bankrupt (liabilities exceed assets). It isthought that the medical insurance system for elderly people aged 75 years old or older was madeindependent at this point to make it clear to the citizens that the liabilities of the medical insurance
system for this age group exceed its assets, and to cover the excess of liabilities over assets byinjecting taxes and the insurance premiums contributed by all citizens into the system.
Furthermore, under the medical system for the elderly until that time, the implementers of thescheme, the municipalities, only paid the medical costs and did not levy the insurance premiums,
so it was unclear where the responsibility as an insurer lay.
The forecast for the medical costs of the latter-stage elderly in fiscal year 2008 is 11.4
trillion yen. Under the new system the 10.3 trillion yen remaining after deduction of the 1.1
trillion yen in medical costs paid by the patients themselves is allocated to public funding (50%),
support funds (40%), and insurance premiums paid by the elderly (10%). If we also take into

95

consideration the taxes paid by the latter-stage elderly (= public funding), the total amount paid by
the latter-stage elderly generation is about 20% of the overall medical costs, and just under 80%of the medical costs has to be made up from other accounts.
V. Introduction of market-based principles to medical care and the failure of this approach
Prime Minister Junichiro Koizumi came into office in 2001 and attempted to eliminate thefiscal deficit and achieve economic growth by deregulating the medical care sector. In June 2001,
shortly after the administration was inaugurated, the following three medical care reforms wereincorporated in a Cabinet Decision (Basic Policies 2001).
1) Lifting the ban on the management of medical institutions by stock companies
2) Lifting the ban on mixed medical services (free combinations of medical services covered byinsurance and private medical services)
3) Lifting the ban on direct contracts between medical institutions and insurers
Under the Koizumi reforms, the medical care reform policy for government and systems
which had been monolithic until then was split into the following three elements (Niki 2007).
Firstly, the reforms considered a United States type of society and “small government” to be ideal
and attempted to slow down the growth medical costs within economic growth. Secondly, there
was the scenario led by the Ministry of Health, Labour and Welfare under which the overall
framework of the previous universal health insurance system was maintained while the scope andlevel of public medical insurance benefits was reduced and the medical guarantee system waspartially reorganized into the “two-tiered public and private system.” In response to these reforms
the medical associations and medical groups called for the universal health insurance system to be
maintained and the overall budget for public medical costs to be expanded.
Niki concludes that the background to the appearance of the Koizumi medical care reforms
was that Japan’s large companies and economic agencies (the Ministry of Economy, Trade andIndustry, etc.) regarded the medical care and welfare sector as one of the growth industries of the
21st century and as one way to escape the economic recession, so they were eager to enter this
sector. Saito (2009) points out that the trends in the long-term debt balance, etc., and changes insocial security policy coincided. He then asserts that the combination of efficiency and fairness
that had been possible in the high growth period became impossible due to financial constraints inthe zero growth period and that a situation arose in which there was no option but to place greaterpriority on efficiency than fairness in the medical care and welfare services sector.
However, the Koizumi administration largely failed to realize the three reforms included in
the Basic Policies 2001. Niki (2007) suggests two reasons for this: 1) an economic reason and 2)
the citizens did not want the reforms. The economic reason was the concern that if the proportionof medical costs paid by the patients themselves under the medical insurance scheme was
expanded and the “mixed medical services” were expanded the market of the companies would

96

expand but not only total medical costs but also public medical costs would rapidly increase.
Furthermore, from the perspective of fairness, there was a fear that income-based discrimination
would become more prevalent and that a structure would be created in which the burden for a partof the consumption of medical care by middle income and wealthier groups would be borne by the
low income group. Furthermore, the citizens and medical care professionals were united in theiropposition to the reforms. In all of the opinion surveys the overwhelming majority of the citizens
supported equal medical care and no more than 10%-20% of the respondents supported mixed
medical services.
In addition to these medical care reforms, the Koizumi administration further strengthened
the traditional medical cost containment policies that had been followed since the 1980s.
Specifically, it raised the ratio of medical costs paid by the holder of the health insurance (from
20% to 30%), lowered fees for medical services for the first time ever, and established laws
related to reform of the medical system. The laws related to reform of the medical systemstrengthened regulation of both the medical insurance system and the medical care provisionsystem in order to keep down medical costs. The major examples are 1) measures to combat
diseases associated with adult lifestyle habits and 2) the policy to reduce the average length of
hospital stays. Prime Minister Koizumi was very popular and his administration lasted for six
years but even during this time the environment surrounding medical care deteriorated further.
Due to these tough medical cost containment policies, the level of medical costs in Japan(total medical costs as a percentage of GDP and per capita medical costs) became the lowest
among the seven leading industrialized countries. Meanwhile, the universal health insurance
system is collapsing with the increase in the number of people in irregular employment (called“freeters” in Japan) and the appearance of people who are de facto uninsured, although their
numbers are still small. This includes those people who do not acquire National Health Insurance
because they cannot pay the insurance premiums, etc. The citizens have been relatively
uninterested in the problem of social security and medical care previously but now the medical
crisis and depredation centered on emergency medical care and obstetric and pediatric medicalcare has become a social problem which is being discussed frequently in the mass media. In
particular, due to medical care professionals quitting their jobs and medical institutions closing,particularly in the field of emergency medical care, situations are occurring in which regional
medical services can no longer be provided. As a specific example, in the fields of emergency
medical care and obstetric medical care regional medical institutions that can accept patients areclosing and there are shortages of medical care professionals, resulting in the problem that thepatients cannot be accepted when necessary.
The time when the collapse of medical structures became more pronounced and the time of
the Koizumi reforms overlapped so the view that these reforms were a direct cause of the collapseof medical care is deeply entrenched. However, it has also been pointed out that the Koizumi
reforms targeted “(big) government that had created bloated government enterprises” and that97

their aim was to defeat the parts of the government that were getting fat on the safety net of
employment insurance, etc., to create a “small government” without waste and to enhance thesafety net necessary for competition. Actually, in the end the three medical care reforms proposedby Koizumi were largely left unimplemented so it is unreasonable to conclude that the reforms
were the direct cause of the collapse. However, the collapse may have been caused by the
distortions in the medical cost containment policies that had been continued for such a long time
becoming obvious at this time.
VI. Discussion[Are Japan’s total medical costs high?]
Japan’s “national healthcare expenditure” is an estimate of the expenditure under Japan’s
medical insurance system and the scope of the estimate is limited to treatment costs for injuries
and diseases, with expenditure that is not covered by medical insurance excluded from theexpenditure total. Therefore, there are some items that are included in the medical costs of othercountries but are not included in the medical costs of Japan. For example, the costs of normalchildbirth and privately-funded dental consultations, excess room charges when hospitalized,
elective therapy charges, special charges such as the first visit charge if the patient does not have aletter of introduction the first time they receive treatment at a given hospital, and health diagnoses
and immunization, etc., with the objective of maintaining and enhancing health, the costs related
to nonprescription drugs and the operation of medical systems, and the costs for the operation of
medical institutions and the development of facilities are not included.1 Therefore, if we estimate
the scope of Japan’s “national healthcare expenditure” making it as close as possible to the scopeincluded in the estimate of the scale of economic activities in the medical care sector in the SNA(system of national account), Japan’s national healthcare expenditure is being underestimated byapproximately one-third (Ikegami 1998).
However, even if we take into consideration this problem with the estimate of the medical
costs, Japan’s medical costs are lower than the medical costs of other developed countries.
Furthermore, whether we look at the international situation or look at Japan’s medical costs as apercentage of GDP, Japan’s medical costs are so low that one wonders how they are kept down tothat level. According to an OECD survey (2003), national healthcare expenditure as a proportionof GDP is high in the United States at more than 15%, and in addition in Switzerland, Germany,
Iceland, Norway, and France this figure is over 10%. Japan has a large economy so the absoluteamount spent on health care is large but relative to GDP Japan is middle-ranked at 17th among

1

From fiscal year 2007 most of the statistics shown in the section entitled “Major Statistics, etc. related to Items not
Included in National Healthcare Expenditure” related to the amount of expenditure and the number of cases of such
expenditure. (Statistics and Information Department, Minister's Secretariat, Ministry of Health, Labour and Welfare (2010),
from page 117 to page 120)98

OECD member states (Figure 2). Furthermore, looking at Figure 3, in other countries such as
Germany, France, Canada, the United Kingdom, Sweden, etc., medical costs resulting from aging
are rising rapidly whereas Japan is the only country in which aging and medical costs are notlinked. This reflects the fact that insurance medical service points, the price of medical care in
Japan, have been set and fixed at a low level.
Figure 2. Ratio of total medical expenditures to GDP (%)

Turkey*PortugalJapan
MexicoPolandCanada*Australia
Sw eden
Luxembourg
Czech Republic*
Italy
GreeceKorea
New ZealandFinland*
Norw ay
Iceland
Slovakia
United Kingdom
Spain
Ireland
Austria
Hungary*
FranceNetherlands
Germany
Denmark
Sw itzerland
Belgium
United States
0.0

5.0

10.0

99

15.0

20.0

Figure 3. Escalation of medical expenditures with aging population

Medical Expenditure per GDP (%)

16
France,
11.2%

14

U.S.A.,
16.0%

12

Canada,10.4%

Germany,
10.5%
Sweden,9.4%

108Japan, ’07,
8.1%

6
Korea,
6.5%

4

U.K.,
8.7%

2
2%

4%

6%

8% 10% 12% 14%
Population Aging Rate

16%

18%

20%

22%

* “Population aging rate” represents proportion of people aged 65 years or older to the entire
population.
* Korea’s data started to be collected from 1980.

Looking at the international comparison of the percentage of medical costs paid by citizens(figure 4), we can see that Japan has kept medical costs low while providing medical care to all of
its citizens. In 2007 Japan’s aging rate was the highest at 21.5% but the percentage of medicalcare borne by citizens was 39.7%, lower than the percentage of medical care paid for by citizens
in countries with a much lower aging rate than Japan, such as the United Kingdom, Germany,
France, Sweden, etc. This shows that Japan’s medical system is very economically efficient but
the system must achieve sustainability and also provide medical services that enable the citizens
to have peace of mind. There is a concern that medical costs are being kept low in Japan throughthe sacrifice of doctors, nurses, and other medical care professionals. In fact in recent years
doctors unable to stand the harsh working environment have left their jobs at hospitals, and as aresult the phenomenon known as “medical care collapse,” in which medical care in some regions
has become unsustainable, has arisen.

100

Figure 4. International comparison of self-pay ratios(%)

Tax burden

Social security burden

Budget deficit in relation to GDP

80

60

37.6

40

28
37.5

25.1
25.6

20
15
0

-20

51.5

8.9

10.8

-3.4

-5.1

-3.8

Japan
(2008)

United States(2005)

23.7

24.6

-4.3

-4

0

France(2005)

Sweden(2005)

United Kingdom Germany(2005)(2005)

19.2

When considering the percentage of medical costs that should be borne by the citizens, thebalance between the percentage of the burden and the benefit rates should be considered. Abe(2007) states that “in places like Sweden and Denmark where the percentage of the citizens’
burden exceeds 60%, the difference from the rate of return to citizens is kept to about 15% so ahigh level of welfare was realized due to the income redistribution effect. As a result, their per
capita medical care expenditure is smaller than in the United States and Japan.” He points out thatthe claim of Thatcherism and Reaganomics that this kind of high burden and high welfare
approach would rob those countries of their vitality and would become deadlocked sooner or lateris unsustainable in light of the fact that the Northern European countries score much higher thanJapan in international competitiveness rankings that incorporate not only a country’s economic
power but also its financial power, cultural power, environmental power, etc. (according to theWorld Economic Forum (Davos Meeting)).
[Japan’s finances and medical costs]
Except for the introduction of the long-term care system in 2000 and the downward revisionin 2002 (the lowering of the fees for medical services), medical costs have been consistently
increasing over the last 50 years. In particular, medical care for the elderly has been growing at an
average of 8% per annum since 1986 and by 1999 it accounted for 38.4% of national healthcare

101expenditure. However, since the introduction of the long-term care system in 2000 this growth incosts has slowed down because the costs for long-term care which had previously been counted as
medical costs were no longer included and in 2003 and 2004 the growth was negative. On theother hand, the ratio of national healthcare expenditure to GDP has rapidly increased since the1990s and reached 8.1% in 2008 (OECD 2010).
Due to the natural increase in medical costs because of aging and the progress of medical
technologies, etc., it is not surprising that medical costs are increasing. Despite this, Japan has notboldly increased medical costs the way that the United Kingdom has, and has not solved the
problem of how to finance medical costs. Debt servicing costs account for 20,123.6 billion yen(24.3%) of Japan’s total expenditure in the general account of 83,061.3 billion yen (fiscal year2008). Tax revenues are 58 trillion yen but if the debt servicing costs of 20 trillion yen are
subtracted only 38 trillion yen of this can be spent. However, the national government spends 63
trillion yen: the 47 trillion yen in its budget plus the 16 trillion yen of tax allocations it must pay
to local governments. The amount of money it can spend is 38 trillion yen so if it covers theshortfall by issuing new public bonds worth 25 trillion yen, the debt will balloon out to 553
trillion yen. In other words, Japan’s financial problem is that the debt is snowballing. The publicbond debtors are the citizens so there is no problem if the debt does not increase. However, weneed to avoid letting the debt grow any greater than it is now. For this reason, Japan isendeavoring to make the medical costs of 33 trillion yen and long-term care costs of 3.3 trillion
yen as small as possible in order to minimize the amount of taxes that are injected into medicalcare and long-term care. As a result, it is trying to reduce the increase in medical costs from 1
trillion yen every year to a yearly increase of 780.0 billion yen, by reducing the costs by 220.0
billion yen.
Japan’s Ministry of Health, Labour and Welfare has expressed the view that “as a result ofaccelerated aging the growth in the medical benefit costs covered by insurance premiums andtaxes is outpacing the growth of the economy, so it is necessary to make efforts to keep down
medical care benefit costs through the reduction and rationalization of medical service provision
costs, the prioritization and streamlining of benefits, etc., in order to ensure that the medical
system will continue to be sustainable in the future.” In other words, it is taking the view that
there are not enough financial resources so containment of medical costs is unavoidable. If tax
revenues greatly increased as a result of economic growth or a national consensus could bereached to inject more taxes into medical costs and long-term care, it would not be necessary tocontain medical costs. However, politicians know that if they directly said “please bear the burden
yourself” to the citizens they would be defeated at the next election so they do not talk about
increasing the burden. It is still fresh in the memory that just recently Prime Minister Naoto Kanmentioned raising the consumption tax to 10%, making his comments just before a House ofCouncilors (Upper House) election was to be held, and as a result the Democratic Party of Japansuffered a huge defeat in the election.

102

Regarding an increase in tax revenues as a result of economic growth, it is clear that Japan
can no longer achieve the breathtaking economic growth it managed in the 1960s and 1970s.
Furthermore, the declining birthrate and aging population means that the productive population is
declining every year so even continuing gradual economic growth will be difficult. Given thissituation, bold reforms will be necessary to maintain the medical insurance system as asustainable social security system. It is essential to have a medical system that can continue tosurvive in tough economic conditions and medical care that meets the needs of the citizens.
[Japan’s medical insurance system does not operate on a nationwide basis]
Japan’s medical system is an awkward system in which the insurance entranceways (levies)
are fragmented and the national government decides the exits (the price of medical care). The
national government decides the price of medical care and decides the ratio of medical costs paidby the patients themselves but, for example, the levying of National Health Insurance premiums iscarried out on a local government basis and local governments also decide the insurance
premiums. Furthermore, employee health insurance is insurance that companies establish for theiremployees so there are an extremely large number of organizations involving in running it. With
employee health insurance, employers and employees share the insurance premiums fifty-fifty but
naturally the insurance premiums and the methods of levying them differ depending on thecompany. Therefore, even if the employees’ income is the same, their insurance premiums differ
depending on the company they work for, and moreover insurance premiums are lower at large
companies than at small- and medium-sized companies. The insurance premiums for National
Health Insurance also widely vary depending on the local government, and the amount of
insurance premiums levied from people with the same income differs depending on the local
government. It has been reported that currently insurance premiums for National Health Insurance
differ by as much as 500%. In addition, insurance premiums naturally differ between cities thatreceive large amounts of business taxes from large companies and the regions in which a large
number of small-and medium-sized companies and micro-enterprises are located.
Thinking about this in terms of the so-called doctrine of fairness, “take a lot from the strong
and give it to the weak,” the basic philosophy underlying social security, it is clear that the current
medical insurance system has lost touch with this principle. In order to correct this it is necessary
to levy insurance premiums justly. The simplest method is to decide insurance premiums solely on
the basis of income, regardless of employment status, age, or residence. To achieve this, it isessential to integrate the insurers and financial resources which are currently fragmented.
Speaking only from the perspective of fairness, it is probably better to take the regions into
account to some extent when deciding insurance premiums. This is because although access to
medical institutions is free in Japan in principle, there are some disparities among regions in the
medical services that can be received. In other words, the patient is free to select the medical
institution for his or her treatment, but usually the patient is limited to select medical institutions103

in or near the region in which he or she lives.
[A sustainable medical insurance system]
Nishimura claims that the value of social security is that it is a “social contract system that
protects people from an uncertain future” and that the “value of guaranteeing a minimum standardof living” and the “mechanism for the reallocation of income” offered by social security aresecondary (Nishimura 2010). He raises the difficulty of making forecasts about the future, giving
the reason that it is difficult for the government to make “wise choices” regarding how toconstruct a “social contract system that protects people.” Fifty years ago no-one forecast theextension of life-spans, economic development and growth in citizens’ income, birthrate forecasts,
etc., that are currently placing the medical guarantee system in such a difficult situation.
Nishimura noted the fact that these kinds of future forecasts are extremely difficult so heconcluded that construction of a system that could respond in a precise and flexible way tochanges in conditions was important.
In particular due to the results of factor analyses of the growth of medical costs, the theory
that by far the greatest portion of the rise in medical costs is due to technological progress is
becoming accepted around the world. This is because the medical expenditure that is expected tobe necessary in the future is influenced by the progress of medical technologies and because it isextremely difficult to forecast how much medical expenditure will be necessary. Moreover, taking
into consideration the fact that the elderly are currently spending more than 30% of the national
healthcare expenditure, benefits to cover the largest portion of the increase in medical costs thatwill occur due to future technological progress will be paid to the elderly. Nishimura asserts thatthe essence of the debate at such a time is how the burden should be distributed among thegenerations.
In other words, the problem of medical insurance is entirely about how the financial
resources needed to fund the medical costs of the latter-stage elderly can be raised. As we statedabove, Japan’s financial position is extremely bad, and the previous policies to contain medical
costs and social security costs were unavoidable in some respects because Japan had to improve
its primary balance. However, today when unease about social security is giving rise to social
unease it is necessary to revise the medical insurance system, including reforms to make its
financial foundation sounder in the future. Japan should begin reducing the outstanding debt assoon as possible, given the need for fairness among generations and the efficient allocation of
resources.
What should be done to raise the financial resources needed to fund the pension? Continue
the current pay-as-you-go pension approach? Or adopt the funded pension approach? Generally
people find that after they retire there income declines as they get older. This means that in order
to cover medical care expenditure in old age it is essential to save some of the insurance
premiums paid during the working years for the future. We will only be able to cover our own

104medical costs in old age if we do this. Therefore, medical insurance will not be financiallysustainable unless a mechanism that prepares people for old age is included when it is designed.
However, Japan’s medical insurance is a kind of short-term insurance that is updated once a year
(based on a single fiscal year account) so it does not have a financial design that prepares people
for old age. One of the criticisms of the Latter-Stage Elderly Healthcare System is that “we have
paid insurance premiums for many years but now they do not count for anything.” Probably these
critics have private sector insurance in mind. They mean that they had finished paying the amountequivalent to their medical costs in old age while they were still working. However, under Japan’s
medical system the contributed insurance premiums are consumed in that year and there is no
structure in place to set aside some of the premiums for the future.
In international terms, Japan is a country in which the percentage of medical costs paid bycitizens is low. That means citizens have a lot of disposable income (income they can spend
freely). Faced with the current financial difficulties of the national government and various
problems related to social security, the citizens are beginning to form the view that in the end
raising taxes and insurance premiums will be unavoidable. Nonetheless, even the people who holdthis view are saying that they want waste to be eliminated and other financial resources to beobtained before the burden is increased. However, “the elimination of waste” is not so simple, notonly in medical care but also in various other sectors. In particular in the medical care sector it isextremely difficult to judge if something “is waste or not?” and the costs of finding waste may inthe end be higher than the costs saved by eliminating the waste. In the future the elderly will be
the majority in society so it is also necessary to abandon the thinking that the young will support
the elderly and accept the idea that the elderly have some kind of social role and some of themwill return to a role in which they help support society.

105References
1

Abe, Isao. Medical reform and the medical service market -for restructuring of thecommunity medical system-. Bulletin of Osaka University of Pharmaceutical Sciences 1(2007): 53-63.

2

Campbell, John Creighton and Naoki Ikegami. The art of balance in health policy:
maintaining Japan's low-cost, egalitarian system. Cambridge University Press, 1998.

3

Fukuda, Motoo. 2003. Hokensha to iryou kyokyuu shutai no Kannkei (Relation between
insurer and health provider). In Iryouseidokaikaku to hokennsha kino (Health system
reform and the role of insurer) Edited by Yasuhiko Yamazaki and Hiroya Ogata. Toyo
Keizai Shimposha.

4Ii, Masako. 2009. "Development of Social Health Insurance Systems: Retracing Japan'sExperience" in Hiroko Uchimura (eds.) Making Health Services More Accessible in
Developing Countries, UK: Palgrave Macmillan.

5Ii, Masako. 2009b. "Nihon: Nihono Iryo Hoken Seido no Ayumi to Sono Konnichiteki
Kadai (in Japanese) (Japan: Development os Social Insurance Systems in Japan)," inMasako Ii (eds.) Asia no Iryo Hosyou Seido (in Japanese) (Health Systems in Asia), Tokyo,
Japan: Tokyo Daigaku Syuppankai.

6

JICA. 2004. Development of Japan’s Social Security System – An Evaluation and
Implications for Developing Countries –. Tokyo: Institute for International Cooperation,
Japan International Cooperation Agency.

7

Niki, Ryu. Health care reform under the Koizumi and Abe administrations in Japan: the riseand fall of neoliberal reform. Monthly Hoken Shinryo, Vol. 62, No. 12, pp. 113-121,
December 10, 2007.

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Nishimura, Shuzo. The future of social security in Japan. Journal of the Institute for Health
Economics and Policy 2010; 21(3):279-289.

9OECD Health Data 2010.

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Saito, Tetsushi. Weekly Economist (May 13, 2008 issue): The Latter-Stage Elderly
Healthcare

System

is

a

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disposal

schemeformedicalinsurance(http://www.dir.co.jp/publicity/column/080529.html).
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Shimazaki, Kenji. 2005. Wagakuni no iryouhoken seido no rekishi to tennkai (History ofJapanese health insurance and its development). In Iryouhoken/sinnryouhoshuseido (Healthinsurance and the system of fee schedules). Edited by Hisao Endo and Naoki Ikegami.

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Uchimura, Hiroko. 2009. "Key Factors for Functioning Health Systems" in Hiroko
Uchimura (eds.) Making Health Services More Accessible in Developing Countries, UK:
Palgrave Macmillan.

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Yoshihara, Kenji, and Masaru Wada. 1999. Nihon iryohoken seidoshi (History of Japanese
Medical Insurance System). Toyo Keizai Shinposha.

106

Insuring the no- or low-income population and balancing
the income inequality: the National Health Insurance programas the base of Japan’s social security
Etsuji Okamoto∗1. Introduction
Insuring the indigent population is the most difficult challenge that the social security
system faces. Japan’s national policy features universal coverage of health insurance (plus pension
program) since 1961. The indigent people are guaranteed not only health care but also equal
benefits as people who pay premiums worth millions of yen! Such a system is supported throughtwo mechanisms: income redistribution through income-related premium and ample input fromthe governmental subsidies. Furthermore, the National Health Insurance (NHI) program functions
as an income redistribution mechanism to bridge the widening gap between the rich and poor.
Japan’s experience will be a lesson to economies for achieving both universal coverage for healthinsurance and social integrity through effective redistribution of wealth.
2. Population coverage
Japan’s health insurance system comprises two main components: the employment-based
system (Japan Health Insurance Association, corporate-based Health Insurance Societies, andMutual Aid Association for civil servants) and region-based system for the non-employed
population (National Health Insurance system and the newly created Latter-Stage Elderly
Healthcare System that insures elderly people aged 75 years or above). The NHI program
managed by municipal governments (villages, towns, and cities) or municipal NHI assumes theultimate responsibility of the residents who are not covered by other systems. A means-tested,tax-funded “Livelihood Assistance” system that includes Medical Assistance (MA) is also
implemented.
Approximately 33% of the Japanese population is covered by municipal NHI and 1.1% iscovered by the MA. Livelihood Assistance is not an insurance system, and it is funded exclusively
by tax subsidies. Unlike other health insurance systems, beneficiaries are not required to pay any
premium or co-payment. Benefits are similar in all the systems. Beneficiaries of MA can avail thesame medical care facilities (no restrictions of providers, drugs, or treatments), and healthcare
providers can receive the same reimbursement as that corresponding to insurance patients.

∗ Etsuji Okamoto is Chief of Business Administration at National Institute of Public Health. He received a M.D. from Kinki
University in 1983, Master of Public Health from UCLA in 1988 and a Ph.D. from Osaka University in 1991. His research
focuses on health economics and health service research using health insurance claims data.

107

Figure 1

The percentage of population under Livelihood Assistance declined in the 1990s when
Japan’s economy was booming, but it recently increased owing to the prolonged recession.

108

Figure 2

3. Premium structure
Municipal NHI also includes many indigent beneficiaries. It insures approximately
one-third of the Japan’s entire population (47 million) in 25.6 million households (premium islevied on households) and about one out of four households had absolutely no reported income (incase of self-employed business people, income = revenue - expenses. If an individual does notreport any income, it does not necessarily mean that he/she does not earn any money at all. It is
widely believed that many of the self-employed people underreport their income).

109

Figure 3

Municipal NHI has a different premium structure. While employment-based healthinsurance levies a premium in proportion to the worker’s monthly wages, municipal NHI has a
two-part premium: income-related portion and fixed portion. For example, Saitama city has apremium rate of 9.1% of the income plus 29,500 yen (per year) per beneficiary (2007). Therefore,a household with no reported income will have to pay a fixed portion of the premium inproportion to the number of household members. A household of four with an annual income of 2
million yen will have to pay 2 million × 9.1% + 29,500 yen × 4 = 300,000 yen annually. The fixed
portion of the premium may further be waived by 20%, 50%, and as much as 70% according to
the situation of the individual household. In any case, all the households will be required to pay acertain amount of premium; this is an important norm of insurance.
For the indigent households who cannot afford to pay premiums, Livelihood Assistance
may be applied after means testing. As shown by the graph below, a majority of the new recipientsof Livelihood Assistance are migrants from the NHI. The NHI and MA have the same benefit
package, and MA does not make co-payment by patients mandatory, unlike the NHI that requiresa co-payment of 30%.

110

Figure 4

4. Cap of premium
The premium also has a ceiling: a cap of annual premium. In 2007, the ceiling was typically
530,000–560,000 yen. In the case of Saitama city, a household of four with an income of 5 million
yen would have to pay 573,000 yen (calculated premium), but in fact, it will be charged 560,000
yen (levied premium); that is, the exceeding 13,000 yen will be waived. Such capping serves as awaiver for high-income households, and hence, it weakens the income redistribution mechanismof the insurance system.
Approximately one million households out of 25.6 million (3.9%) exceeded the cap in 2007,
and a total of 0.7 trillion yen was waived out of 4.8 trillion yen of the calculated premium (14.6%).
This relationship can be illustrated as follows:111

Figure 5

It can be assumed that the rectangle (expressed as ABCD in the graph) is constant. It
signifies the area (percentage of households exceeding the cap) × (percentage of the cumulative
premium of households NOT exceeding the cap in the total premium calculated). The national
average of the size of rectangle ABCD was 0.26.
Suppose that P% of the households exceed the cap (CD) when the cap is set at Q yen. Then,the percentage of the premium of the households NOT exceeding the cap (AC) is 0.26/P, and thepremium levied from the households exceeding the cap (EB) is Q × P × N. Finally the % of thepremium waived for the households exceeding the cap (EF) is R - (0.26/P) × R - (Q × P × N),
where R is the total premium calculated and N is the total number of households.
The size of the rectangle varies across municipalities. However, the distribution of the sizeof the rectangle over the 2,262 municipalities concentrates considerably around the national
average, as shown below:

112

Figure 6

5. Evaluation of income redistribution effects
One of the important functions of social security is income redistribution, that is, levying
heavier tax or premium on the wealthy and providing it to the needy. The effectiveness ofredistribution is measured by the Gini coefficient by comparing the coefficient of the originalincome distribution and the coefficient of the income distribution after deducting the contribution(tax and premium) and adding the benefit (health care benefit is typically provided as service inkind and converted into monetary value).
To evaluate the effectiveness of redistribution, Ministry of Health, Labour and Welfare(MHLW) conducts a nationwide sampling survey “Income Redistribution Survey” every three
years, the latest of which was conducted in 2008 (surveyed households: 9,144, sample size: 4,792,
response rate: 52.4%). The survey has some methodological limitations: it is a one-timequestionnaire survey unlike the Household Survey that requires all the surveyed households tomaintain a diary for the entire year.
Japan was once considered as an “egalitarian” country as evidenced by the low Gini
coefficient around 1972–1981. However, the Gini coefficient has constantly increased to date (i.e.,
the gap between the rich and poor has widened) and the gap is narrowed by income redistribution
through tax and social security (it should also be noted that the accuracy of the estimate of thesurvey is declining because of the declining sample size).

113

Figure 7

Moreover, the estimate of the benefit of health care is approximate; the health careexpenditure of a household was estimated by simply multiplying the number of doctors’ visits by
the average expenditure instead of collecting micro data such as health insurance claims. Further,
the estimated health care benefit is subject to a large variance owing to the small sample size (notethat the estimated benefits widely vary in income brackets with a small sample size, while thehighest and lowest income brackets show consistent estimates owing to a large sample size).

114

Figure 8

Nonetheless, the survey is the only source of data for income-specific health careexpenditure (MHLW has been conducting surveys on health insurance claims including theincome and occupation of an individual beneficiary, for the last 50 years, but the results havenever been officially published). Therefore, the author aggregated three surveys in 2002, 2005,
and 2008 to provide reliable estimates of income-specific health care benefit.
The contribution (premium for health insurance) and health care benefits broken down by
the income class are stated as follows:115Figure 9

Premium contribution increases as the income of households increases but the benefit isconsistently larger than the premium contribution. This is because approximately one-third ofJapan’s national health care expenditure is subsidized from the government. However, thecontribution appears different when only the NHI is considered (below).

116

Figure 10

First, the premium contribution is heavier than the national average except the very
low-income class. It hit the cap (530,000–560,000 yen) at the income class of five million yen andabove. In some income classes, premium contribution is heavier than the average health carebenefit.
When measured by the Gini coefficient, NHI households are characterized by a large
inequality among themselves. The Gini coefficient of the surveyed households of the Income
Redistribution Survey was 0.53 in 2008. This inequality was remedied by tax, premium of healthand pension insurance, and social security benefit of both cash and services in kind to 0.4 or areduction of 24.5%. When compared with the NHI, the income redistribution effects were higher
in NHI (reduction from 0.65 to 0.41, or 37% reduction). While this was an encouraging result, it
should be noted that the income redistribution effects would have been larger if the cap ofpremium did not exist. With an appropriate setting of the premium cap, the health insurance
system would be effective not only as a health care security but also as an income redistribution
mechanism that contributes to social and economic integrity.

117Figure 11

Figure 12

6. Conclusions
This paper demonstrated that Japan’s NHI program not only guarantees equal opportunity
for health care but also provides an effective income redistribution mechanism, thereby closing
the gap among social classes. However, the author would like to point out that Japan has long
been neglecting the analysis of its health insurance system from the perspective of social equality
and income distribution. This is clearly evidenced by the fact that MHLW has conducted asampling survey linking individual health insurance claims with the income and occupation ofeach beneficiary every year for as long as 50 years, but the results have not been officially118

published. The author had to use inaccurate estimated data from another survey as a substitute,and therefore, the findings of this study are subject to limitations.
A growing number of economies in the Asia-Pacific region are making efforts to develop anational health insurance with universal coverage. Health policy makers and the general public arenaturally concerned about the technical aspects of insurance: the benefit package and premium
setting. However, one should not neglect the important role of a health insurance program as asocial security system and its most important functions: redistribution of wealth and securing the
integrity of the nation. Therefore, policy makers and designers of insurance policies should
evaluate and monitor the effectiveness of income distribution functions of every health insurance
scheme. This study provided a useful methodology for such an analysis.

119Health System Reforms in China:
Is Universal Coverage Enough to Solve the Problems?
Hiroko Uchimura∗

1. Summary of Challenges and Possible Options
China’s economic growth has been highly impressive. China has achieved over 9 % growth
per year since the 1990s, which has attracted worldwide attention. Along with the economic
development, socioeconomic conditions have changed considerably in China. These changes
brought about decay in the conventional health systems based on state owned enterprises (SOEs)
or people’s communes. Instead, governments were required to take substantial responsibility for
restructuring and financing the health systems. On the contrary, governments, and particularly thecentral government, actually tightened the fiscal investments in the health sector in the 1990s. As
a result, most of the population was uninsured and individuals came to bear most of the financial
burdens of obtaining health care services.
Against such deterioration in the health system, the central government eventually initiatedrestructuring of the health system at the end of the 1990s; that is, it institutionalized new healthinsurance programs. A health insurance program was established for urban employees in 1998
(Urban Employees’ Basic Medical Insurance), and for the rural population in 2003 (newCooperative Medical Scheme). Pilot programs of health insurance for urban non-employees
started in 2007 (Urban Residents’ Basic Medical Insurance). Initially, the insurance coverage rate
was quite low; however, recently, the government has increasingly stressed the importance of
expanding the coverage and has increased the fiscal subsidy for the insurance funds. Consequently,
health insurance coverage has substantially increased both in urban and rural areas. By the end of
2007, coverage of the new CMS reached 86.2 % (Ministry of Health 2008).
Expansion of health insurance coverage has resulted in some progress in health system
reforms in China. However, broadening the coverage has not sufficiently reduced patients’financial burdens related to obtaining needed health services. In fact, in 2007, half of the total
health expenditures were still financed through out-of-pocket payments (OOP). Is expanding
health insurance coverage enough to lighten people’s financial burdens so that they can accessneeded health care services? This is a key question to examine among the challenges in China’s
current health system.
The present Chinese government is concerned with these health issues, and has launched
new health system reform plans. In April 2009, the government presented guidelines for the health∗ Hiroko Uchimura is an associate senior research fellow of Institute of Developing Economies, IDE-JETRO Japan. Her
research work covers policy analysis, related to public finance, fiscal decentralization, health financing and health system
reforms, as well as issues on income distribution. Her work mainly focuses on developing economies in Asia.

121system reforms which include fiscal outlays of CNY 850 billion (about US$125 billion) from2009 to 2011 (details in section 5 of this paper). Not only the amount of funds but also their
allocation in the health sector has a critical impact on the outcomes. The reform has just been
initiated; hence, it is a good time to review current health systems in China and examine barriers
to improving people’s access to needed health care. In this context, this paper will analyze
challenges in China’s health system and propose possible options to address the challenges. The
main findings and recommendations in this paper are summarized below.
1.1 Challenges in China’s health system
Benefits restricted to limited areas
At present, there are three insurance programs that are supposed to cover China’s entire
population.1 Two programs are for the urban population: the Urban Employees’ Basic Medical
Insurance (UEBMI), and the Urban Residents’ Basic Medical Insurance (URBMI). Anotherprogram has been prepared for the rural population: the new Cooperative Medical Scheme (newCMS).
These medical insurance programs have three salient features. First, the insurance programs
are segmented on the basis of urban or rural registration (the hukou system). Second, people aresupposed to be enrolled in one of the urban programs or the rural program depending on theirurban or rural registration (the hukou) which does not change even with population mobility.
Third, the insurance schemes are mostly restricted to limited areas. This means that people canbenefit from the insurance only in limited areas, which are primarily the localities where they are
registered in the insurance programs.
These features make certain people, particularly rural migrants, unable to benefit frominsurance. Rural people are supposed to be registered in the rural program (new CMS) based on
their rural registration, which does not change even if they move to urban areas as rural migrants.
As mentioned above, most insurance schemes designate local health services. The central
government currently encourages local governments to include rural migrants in the urban
insurance program (URBMI); however, as OECD (2010) pointed out, URBMI has not been
properly extended to rural migrants. Under such conditions, rural migrants cannot benefit from theinsurance practically if they obtain health care services in the localities where they actually reside.
In addition, serious concerns exist regarding the substantial disparity in quality and quantity ofhealth care services between urban and rural areas, or between provinces. If people cannot obtainneeded health care services in their insurance-registered localities, they have to bear most of thefinancial burdens of obtaining the needed services in other localities.

1

In addition, a Medical Assistance program has been prepared to support the certified poor who cannot afford to contributeto insurance premiums.

122Benefits are too small
UEBMI, financed by premiums contributed both by employees and employers, reimburses
the expenditures both for outpatient and inpatient care. Most URBMI and new CMS schemes also
include both inpatient and outpatient benefits. However, the benefits skew considerably toward
inpatient care; thus, the benefit level for outpatient care is quite low. Based on one estimate, it isindicated that the average reimbursement rate, including reimbursement both for inpatient andoutpatient care, is about 30% (Wagstaff et al. 2009). Moreover, Herd, Hu and Koen (2010)
pointed out that the actual reimbursement rate for catastrophic illnesses is much lower than thescheduled rate, due to insufficient funding. Because of such limited insurance benefits, patientsare still required to bear a large portion of financial costs for obtaining health care services, even
if they are insured.
Service costs are climbing
The government tightened its investment in the health sector in the 1990s. This affected not
only the demand-side (the patients’ side) but also the supply-side (the providers’ side). Althoughmost health institutions are public in China, they came to rely on their own earnings. As a result,health institutions in China have become almost commercialized. Along with suchcommercialization, the pricing system for health care services and pharmaceuticals fuels the risein service costs.
Prices of most health care services are regulated in China. The regulations set prices forgeneral services that are lower than the actual cost of providing such services. On the contrary,some services with high-tech equipment cost much more than the actual cost of providing suchservices. For instance, the service with CT scans costs over 50% more than the actual cost ofprovision (OECD 2010). With regard to pharmaceutical prices, hospitals are allowed to make a
15 % (or 30 % in some cases) mark-up over wholesale pharmaceutical prices.
Such price regulations induce over-prescribing or excess-provision of high-tech andexpensive services. It has been noted that some hospitals set pharmaceutical sales targets or link
doctors’ payment/bonuses to their monetary outputs, particularly regarding sales ofpharmaceuticals or high-tech services (OECD 2010, Hu et al. 2008). This situation drives anincrease in service costs.
1.2 Possible Options
To address the challenges, the following outcomes are expected from the reform:
1) Enrollment in the insurance programs based not on the urban/rural registration system (thehukou system) but on actual place of residence;2) Lifting the restriction on areas where insured people can benefit from their insurance;
3) Increasing the level of insurance benefits;4) Containing the costs of health care services.

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To materialize the outcomes, the proposed options are summarized as follows.
Implementing the central government initiative
Regarding the first point, the central government has recently encouraged local
governments or enterprises (employers) to include rural migrants in the urban insurance programs,i.e., URBMI or UEBMI. That is, the central government is trying to adjust the schemes for people
to be enrolled in the insurance programs based on their actual place of residence. In addition, as
detailed in section 5, other policies, namely the urbanization policy and the reform in the hukou
system, will contribute to addressing the problems caused by the enrollment system in whichpeople need to be registered in the insurance programs based not on their actual place of residence
but on their hukou registration. The progress of those reforms, however, varies considerably
between localities because local governments take the practical initiative in implementing thereforms. Such diversification may also widen the disparity in health between localities. The
central government needs to take a substantial initiative by enacting necessary laws and providing
fiscal support.
Building a cross-subsidy or a unified fund pooling system
In order to lift the restriction on the areas where the insured can benefit from insurance, it isnecessary to establish a cross-subsidy system between insurance schemes (localities) or a unified
fund pooling system. For instance, in the Philippines, although there are several insurance
programs based on the insured’s employment status, an insurer, i.e., PhilHealth, pools the funds
from all insurance programs. Hence, the insured can benefit from their insurance regardless of
where they obtain health care services. The other experience in the Netherlands indicates that inparallel with keeping each local insurance fund, a central fund can be set up and the central fundcan be reallocated to local funds (Wagstaff et al. 2009). Sources for the central fund would beincome-related contributions from the insured as well as subsidy from the central government.
Increasing funding levels
The insurance benefits for outpatient care, and particularly for chronic disease care, must be
expanded; at the same time, reimbursement for inpatient care expenditures also needs to be
increased to meet the scheduled reimbursement rate. The current funding level is too low to allow
for expansion of the insurance benefits. In particular, the funding level for the new CMS is quite
low compared with the actual health expenditures. In this sense, central fiscal support is necessary
to raise the funding level and expand insurance benefits.
Together with the central fiscal subsidy, several means may apply for the insurance schemes.
First, the individual contribution required under URBMI and new CMS can be modified to relate
to the income level of the insured. Although administrative capacities of insurers may be anotherchallenge in implementing such modifications, this would contribute to increasing each insurance124fund. Second, the above-mentioned cross-subsidy system and a central fund system can be applied
to the insurance fund system, which will contribute to an increase in the insurance benefit level. A
cross-subsidy system between insurance schemes will equalize insurance funds horizontally; thatis, insurance funds are redistributed from high-income funds to low-income funds, which willcontribute to increasing the insurance benefit level of low-income funds. In addition, a central
fund can be used to further increase the average benefit level. These attempts will also be
conducive to establishing a unified insurance program at the country level in the future.
Injecting necessary fiscal resources into the supply-side and modifying payment schemes
It is necessary to increase fiscal investment in the supply-side of health systems in order toimprove the quality and quantity of health facilities in rural areas/poor regions and secure acertain income for the providers. Such reform will ensure a certain level of health service
provision with the population as well as redress the commercialization of health institutions. In
addition, improving the quality of providers, particularly providers in rural health facilities, is alsoessential. Those reforms in the supply-side will improve the referral system of the health service
provision, which will also contribute to controlling total health expenditures. The central
government referred to the supply-side reform in its guideline for new health system reform plansreleased in 2009. It stressed the importance of improving the quality and quantity of healthfacilities, in particular the lower-tiers of facility that are supposed to provide primary care.
The payment scheme for providers also needs to be reformed. By providing necessary fiscal
support to health institutions, the institutions will not have to rely as much on their own earnings
to finance the provision of health care services. In addition, payment schemes for hospital doctors
need to be modified. As suggested in other studies (e.g., Yip and Hsiao 2009, Herd, Hu and Koen
2010), a salary-payment system for hospital doctors is worth considering.
Regarding the pharmaceutical pricing system, the government has noticed the problems
related to the mark-up schemes and is initiating the establishment of an alternative pricing system.
The guidelines indicate that a new essential drug system will be established to secure reasonable
prices for the drugs for common diseases. However, as OECD (2010) pointed out, the drug systemcovers limited pharmaceuticals; in addition, if the payment scheme for doctors is not be modified,
total costs for pharmaceuticals may not change significantly.
Integrating a tax financing system into the insurance system
Apart from those four measures to address the challenges, the alternative is to establish
another health financing system. As mentioned, considerable fiscal investment, particularly thecentral fiscal fund, is required for the health system reforms in China. In this sense, establishing ahealth financing system by integrating a tax financing system into the insurance system is worth
considering. A tax financing system will provide basic and inexpensive health services to theentire population via public health institutions. In the case of Australia, a tax financing system125

provides services that are basically free and cover critical care and advanced medical services,while private health institutions provide non-critical care (Maruyama 2009). A tax system would
ensure that all the population can access a certain level of health care services. In addition, private
health providers provide people with more choices. It would be debatable what services should be
included in the tax financing system. In the context of current China, in addition to primary care,critical care should be included in the system.
The integrated system may address the above-mentioned challenges simultaneously. The
system, funded by fiscal resources, ensures the provision of basic health care services for the
population; therefore, the above-mentioned first challenge will be addressed. It will address thesecond challenge because services provided by the tax financing system will cover a large part ofoutpatient care. In addition, payment schemes for doctors in the tax system will be modified,
which would also be conducive to controlling service costs.
This system, however, may have other problems, such as long wait times at the public
institutions. In addition, the system will not address the disparity in health between high-income
and low-income people, and it will not improve the quality and quantity of health institutions inrural areas/poor regions. The quality and quantity of service providers is critically important inorder to ensure access for the entire population to needed services. To establish such an integrated
system, the central government needs to take a strong initiative and provide necessary fiscal
supports.
2. Health Status and Health Resources in China2
2.1 Health status
Health status as a whole country
We first look at epidemiological transition in China. The three major diseases, namely
malignant neoplasm, cardio-vascular diseases and cerebrovascular diseases, are in the upper
ranking both in urban and rural areas (Table 1). It shows that the chronic disease is a major healthconcern in China today, which is a common phenomenon in developed economies. Ageing might
be one of the background factors for this epidemiological transition, which is also a common issue
in developed economies.

2

This section is based on Uchimura (2009a, 2009b), and the author revised and compiled the contents.

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Table 1: Epidemiological transition and Age structure
Epidemiological transition
Urban areas
1990
Cause of death
1stmalignant

2006
(%)

Cause of deathmalignant

1990
(%)

respiratory(%)

Cause of deathmalignant(%)(1,000 people)

2000

2006

114,333 126,743 131,448
26.4

36.2

43.9

20.4

Rural population (%)

73.6

63.8

56.1

16.4

0-14 years old (%)

27.7

22.9

19.8

13.9

15-64 years old (%)

66.7

70.1

72.3

5th injuries/poisoning 6.9 injuries/poisoning 6.1 injuries/poisoning 10.7 injuries/poisoning 8.9

over 65 years old (%)

5.6

7.0

7.9

2nd
3rd
4th

cerebrovasculardiseasescardio-vasculardiseases
respiratory
diseases

20.8
15.8
15.8

cardio-vasculardiseases
cerebrovasculardiseases
respiratory
diseases

17.7
17.1
13.1

diseases
malignantneoplasm
cerebrovasculardiseasescardio-vasculardiseases

24.8

1990
Total population

Urban population (%)

neoplasm

27.3

Cause of death

2006

25.1

neoplasm

21.9

Age structure

Rural areas

17.5

neoplasm
cerebrovasculardiseases
respiratory

16.2
10.8

diseasescardio-vasculardiseases

Source: Author’s compilation based on data from the Health Statistical Yearbook of China 2007.
There are two salient features in China’s age structure: rapid contraction of the young
population, and expansion of the elderly population (Table 1). The well-known “One-childpolicy” is a major factor for the rapid decrease in the young population. Crude birth rate has
particularly reduced since the 1990s. It was reduced to 12.09 in 2006 from 21.06 in 1990. On thecontrary, the elderly population is increasing steadily, and the pace of ageing is anticipated to beacceleratory (Wang and Mason 2005, Xiao 2007a). The ratio of the elderly population (population
over 65 years old) to the total population was about 7% in 2000, and it is predicted to be double,i.e., 14%, in 2027, which is almost the same pace as Japan’s ageing experiences (Xiao 2007b).
These changes in age structure and epidemiological transition have a critical impact on thehealth system in China. A large part of the population is seeking/will seek medical treatment forchronic diseases. The health system needs to provide some financial protection for such treatment;
otherwise a considerable part of the population has to bear most of the financial costs to obtainneeded health care services. Medical treatment for chronic diseases does not necessarily
accompany hospitalization, which is not well-covered by the current health insurance programs in
China, particularly by URBMI or the new CMS.
Figure 1 shows changes in the under five-year-old mortality rate (U5MR) and economic
growth (per capita GDP) in China and other developing Asian economies. U5MR is an important
health indicator in developing economies, which is included in Millennium Development Goal
(MDG) indicators. Compared with other Asian developing economies, China’s economic growth
was impressive between 1990 and 2000. However, improvement in its health status (U5MR) was
the slowest of the Asian economies. After 2000, the pace of China’s improvement in health statuscaught up with that of other Asian economies.

127

Figure 1: Changes in mortality levels and economic growth in China and developing Asian
economies: U5MR and per capita GDP

Note: Author’s compilation based on data from The United Nations Site for the MDG Indicators,
United Nations, and World Economic Outlook, IMF.
Size of the circle in (1) indicates the level of U5MR for each economy in 1990.
Size of the circle in (2) indicates the level of U5MR for each economy in 2000.
In both cases, larger circles indicate higher mortality levels. Per capita GDP is on apurchasing-power-parity basis.
China already has the same health concerns as developed economies; at the same time,128

basic health conditions have not improved sufficiently compared with its impressive economic
development. Reforming China’s health system is required to address the dual challenge.
Health status within a country
Looking at the health indicators within a country, the trend and level of indicators differ
between urban and rural areas in China (Figure 2). The level of infant mortality rate (IMR) is
about 15.0 over 1,000 live births, which is lower than that in Thailand in 1995 (17.0). On thecontrary, the IMR was more than three times higher in rural areas than in urban areas in the 1990s.
The disparity gradually began to decrease after 2000. The mortality level of all of China isstrongly affected by that of rural China, which reflects the heavy weight of the rural population asa proportion of the national population. This suggests that, in order to improve health status in
China, rural health status must be improved.
Figure 2: Changes in IMR in China

Source: Author’s compilation based on data from the Health Statistical Yearbook of China.
In addition to the disparity in health status between urban and rural areas, the disparity
between provinces is also critical in China. The maternal mortality rate (MMR) significantly
differs between provinces (Figure 3). The provincial MMR appears to be mostly in inverse
proportion to the provincial economic level. The MMR of affluent provinces (cities), such as
Tianjin (6.6) and Beijing (7.9), is almost at the same level as that of Japan (6.0, 2005)3, which is in
3

The source of Japan’s MMR is the Millennium Development Goals Indicators. The official United Nations site for the
MDG Indicator is: http://unstats.un.org/unsd/mdg/Data.aspx

129

fact less than one-tenth of the MMR of less developed provinces, such as Guizhou (79.3), Qinghai(88.5), or Xinjiang (92.1). The MMR is generally improved by proper prenatal checkups anddelivery at health institutions. And it is important to provide vaccination and proper treatments fordiarrhea and pneumonia in order to improve the IMR. The above figures indicate that theconditions of primary health care services, including maternal health services, lag behind in rural
areas or less developed provinces in China.
Figure 3: Maternal mortality rate (MMR) and per capita GDP by province (2006)

Source: Author’s compilation based on data, including 30 provinces, from the Health Statistical
Yearbook of China and Statistical Yearbook of China. Tibet is excluded because its MMR is
exceptionally high (244.1).
2.2 Health resources
In China, the number of hospital beds per 1,000 people was 2.4 in 1995, which remained at
almost the same level for a decade (2.5, 2005) (Figure 4). This figure is lower than that of Korea(6.6, 2002), but it is almost at the same level as Thailand (2.2, 2000). As presented in Figure 4, thenumber of doctors per 1,000 people was 1.5 in 2005, which is not relatively low compared withother Asian economies, such as Korea (1.6, 2003) or Malaysia (0.7, 2000). These figures indicatethat China’s health output level as a whole country is not low compared with other Asian
economies.

130

Figure 4: Number of health resources per 1,000 people in China and other Asian economies

Source: Author’s compilation based on data for China from the China Statistical Yearbook, andfor other Asian economies from WHO Statistical Information System (WHOSIS).
However, the number of doctors or hospital beds per 1,000 people varies among provincesand differs between urban and rural areas in China (Table 2). The number of hospital beds per
1,000 people is 6.79 in Beijing and 6.81 in Shanghai, which is the same level as Korea (6.6, 2002),
while it is much lower in other less developed provinces, such as 1.69 in Guizhou or 1.98 in
Jiangxi. In addition, the level of health outputs in rural areas, i.e., the number of beds in healthcenters per 1,000 rural population, is very low.

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Table 2: Health resources by province
Doctors

Hospital Beds

(per 1,000 population)
National

Beds in Townships and(per 1,000 rural population)

1.52

2.70

0.80

4.28 (Beijing)

6.81 (Shanghai)

2.38 (Shanghai)

3.23 (Shanghai)

6.79 (Beijing)

1.29 (Beijing)

2.65 (Tianjin)

4.58 (Tianjin)

1.29 (Jiangsu)

1.11 (Guanxi)

1.98 (Jiangxi)

0.55 (Guanxi)

1.06 (Guizhou)

1.95 (Guanxi)

0.47 (Guizhou)

1.01 (Anhui)

1.69 (Guizhou)

0.46 (Ningxia)Standard Deviation

0.68

1.21

0.36

Median

1.53

2.78

0.78

Sample313131Highest Three

Lowest Three

Source: The numbers of hospital beds per 1,000 people and beds in townships and villages healthcenters per 1,000 rural people are based on 2006 data from the Health Statistical Yearbook of
China. The number of doctors is based on 2005 data from the China Statistical Yearbook for
Regional Economy.
Based on the 2003 nationwide survey on health services, there are considerable differences
between urban and rural areas in physical access to health institutions.4 The survey reveals that
more than 80% of people in urban areas can access any health institution within 10 minutes, but
only 40% of people in rural areas can do so. Moreover, the quality of health care services issignificantly behind in rural areas compared with that in urban areas. It has been noted that there
are substantial gaps in education/training levels and experiences of doctors/health care service
providers between urban and rural areas (Anson and Sun 2005).
Those figures indicate that health resources are not adequately distributed between andwithin provinces or between urban and rural areas in China. The density of health resources alsosignificantly varies between urban and rural areas. The quantity and quality of health care services
in some affluent provinces appear to be close to those of developed economies, while those inrural areas, particularly in some poor provinces, lag far behind. Such disparity in quantity andquality of health care services within a country poses serious concerns for health equity in the
country. In addition, such disparity might affect the patterns of health care-seeking behavior.
People living in rural areas/poor regions might not prefer to visit primary health facilities in theirlocalities because they anticipate that the facilities might not provide proper medical care. Oncepeople come to suffer from serious health problems, they will visit secondary or tertiary healthcare facilities. This pattern of health care-seeking behavior would cause a further increase in total
4

Regarding the survey study, aggregated data is provided by the 2003 Nationwide Health Service Survey (2003 Guojia
Weisheng Fuwu Diaocha), which is included in the Health Statistical Yearbook of China 2007.

132

health expenditures. In addition, it would also cause serious financial burdens for individual
patients. By increasing fiscal investment, the quantity and quality of health facilities in rural
areas/poor regions need to be improved substantially. Such reform is necessary for improvement
not only of health equity in China but also of health financing conditions.
3. Health Systems in China5
3.1 Conventional health system and its decay
The health system has differed between urban and rural areas, and more precisely between
the urban registered population and rural registered population, since before the economic reformin China. Health service provision in urban areas was based on the labor insurance system (LIS)
and the publicly funded health system after the 1950s (Zhang 2001, Wong et al. 2006). Healthcare services were provided mainly for employees and retirees of SOEs based on the LIS, whereas
health care services were provided for personnel and retirees of government organs andinstitutions based on the latter system. Health service provision was primarily financed throughSOEs under the former system, and financed publicly in the latter system. Regulated funds were
provided for the assigned health institutions, and the assigned institutions provided basically freeservices for the members.
Health care service was provided through the cooperative medical scheme (CMS) in rural
areas after the late 1950s (World Bank 1997, Li 2004, Wong et al. 2006). The CMS is based on
people’s communes, and was financed by subsidies from people’s communes and member
contributions. The CMS covered a part of health care service costs, and patients needed to pay forremaining costs. Although the health system in rural areas, i.e., the CMS, did not provide freeservices, the spread of the CMS over rural areas contributed greatly to improvement in rural
health (World Bank 1997).
Along with rapid economic development, socioeconomic conditions significantly changedin China. Such changes brought about decay in the conventional health system based on SOEs inurban areas or people’s communes in rural areas. In line with the penetration of the market
economy, SOEs began to suffer from deficits. A main reason for the deficit was the healthfinancial responsibility of SOEs to provide their employees and retirees with health care services(Nakagane 1999, Li 2004, Zhu 2004). SOEs, suffering severely from the deficits, came to beunable to finance health service provision (Liu 2002, Wong et al. 2006). Another result of
introducing the market system was an increase in non-SOE type of enterprise, such as private or
foreign-affiliated companies. The conventional health system did not cover employees of those
non-SOEs. All those changes made the conventional health system, namely LIS in urban areas,malfunction. By the same token, reforms in the health system were needed in order to solve the5This section is based on Uchimura (2009a, 2009b) and Uchimura and Jütting (2009), and the author revised and compiled
the contents.

133

financial problems of SOEs and promote SOE reforms.
Along with the economic reforms in rural areas, the rural health system, i.e., the CMS, alsobegan to malfunction. Agricultural production, administration or social services were based on
people’s communes in rural areas. Economic reforms, however, moved the production base fromcollectives to the household by initiating a household production responsibility system. Thisbrought about the disbandment of the people’s commune that was the organizational and financial
basis of the CMS, which ultimately weakened the function of the CMS (World Bank 1997, Li
2004, Zhu 2004). The conventional health system needed to be reformed. The health system,
however, was not restructured along with changes in socioeconomic conditions. Particularly,
health system reform in rural areas was almost ignored.
Instead of SOEs or people’s communes, governments were required to take substantial
responsibility for financing health service provisions. However, the central government tightened
its fiscal investment in the health sector over the 1990s, and left most responsibilities for healthservice provision to local governments (Blumenthal and Hsiao 2005). It was noted that local
governments in poor regions, suffering from a lack of fiscal resources, did not take sufficient
responsibility (World Bank 1997, 2005). The fiscal capacity of local governments in China began
to have a critical effect on health care service provision at their localities.
3.2 Introduction of new health insurance programs and challenges
Because of decaying the conventional health systems both in urban and rural areas, theindividual patient came to bear a considerable portion of the financial burdens to access healthcare services. At the same time, health service providers suffered from insufficient financial
capacity to provide proper services. Against this, the government eventually initiated theestablishment of new health insurance programs at the end of the 1990s. At first, a healthinsurance program was established for urban employees in 1998 (Urban Employees’ Basic
Medical Insurance (UEBMI)), which is funded by premiums contributed both by employees andemployers (Ministry of Labour and Social Security 1998, Li 2004, Wong et al 2006). This
insurance program targets only formal employees in urban areas who have an urban registration.6
The dependent family members of urban employees are not eligible to enroll in the insurance
program because the enrollment unit of the program is the individual employee (Ministry ofLabour and Social Security 1998). Moreover, based on the original scheme, rural migrants who
emigrate from rural areas to urban areas and inhabit urban areas were also ineligible to enroll in
the insurance program. Therefore, a substantial portion of the urban inhabitants was still
uninsured.
6

China’s registration system (hukou system) segments the population into the urban population and rural population. There
hence exist two types of registration (urban registration and rural registration) which in general do not change withpopulation mobility. In recent times, however, population mobility has increased in China, and the hukou system has
gradually become more flexible. In addition, in line with urbanization, some of the rural population has become part of theurban population (urban registration). However, current health insurance programs mostly reflect the distinction between
urban and rural registration based on the hukou system.

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In order to include the non-employee urban population (mainly dependent family membersof urban employees) in the insurance coverage, in 2007 the government initiated pilot programs
for a new urban health insurance program (Urban Residents’ Basic Medical Insurance (URBMI))(Ministry of Labour and Social Security 2007). To support this insurance program and expand thecoverage, both central and local governments subsidize the insurance fund. This new urban healthinsurance program is hence funded by the individual premium and subsidies from central andlocal governments. The subsidy from the central government mainly targets central-western
provinces. Dependent family members and informal workers who are urban residents (the urban
hukou) are eligible to enroll in this insurance program. Base on the original scheme, rural
migrants were generally not eligible to enroll in this urban insurance program because they are notpart of the urban registered population based on the hukou system. However, as discussed below,
the central government has recently encouraged local governments or employers in urban areas toinclude rural migrants either in URBMI or UEBMI, although such access for rural migrants has
not progressed well so far.
After the 2000s, the government eventually took action to restructure the rural healthsystem; that is, the new cooperative medical scheme (new CMS) was established in 2003
(Ministry of Health 2003, WHO 2004). The enrollment unit of the new CMS is the family(household). The premium is, however, charged on a per capita basis, and thus each household
premium is the sum of all family members’ premiums. All family members are required to enroll
in the new CMS en masse. In order to support this scheme and restore the rural health system,
central and local governments subsidize the new CMS fund (Ministry of Health 2003). The
central government subsidizes the new CMS mainly in central-western regions where economic
levels are relatively low. In addition, the government has made efforts to increase coverage of the
new CMS. 7
On the back of the government initiative, health insurance coverage has expanded; theimprovement in recent years has been remarkable. For instance, the number of people enrolled in
new CMS reached more than 800 million in September 2009. However, as shown in the next
section, half of total health expenditures were still borne by individual patients (out-of-pocket
payment: OOP) in 2007. Although the insurance coverage is broadening steadily, the peculiarityof the insurance schemes hinder a certain part of the population from benefiting from theinsurance.
The critical concern is that the insurance programs are basically segmented based on urban
and rural registration (the hukou system), and the registration does not change along with actual
population mobility. Rural migrants are registered as part of the rural population even if they
actually inhabit urban areas. Thus, based on the original scheme, they were ineligible to enroll inthe urban insurance programs. In addition, the insurance programs are planned so that insured
7

In central and western provinces, the individual annual premium was 10 CNY, and the subsidy from the central and local
governments was 20 CNY respectively in 2007. The central government raised its subsidy to 40 CNY per person per year in
the two years from 2008.

135

people basically utilize the health institutions where they are registered in the insurance programs.
Consequently, rural migrants are practically excluded from the insurance benefits unless theyobtain health care services in their registered rural localities. Moreover, it has been noted that thesegmentation of the insurance programs based on urban and rural registration (the hukou system)
is one of the critical factors leading to health disparity between urban and rural areas in China(WHO 2004).
The government has recently taken these concerns seriously, and it referred to theimportance of the portability or the continuation of health insurance programs over areas in the
new health system reform plans released in April 2009. The reform plans suggest that if rural
migrants sign employment contracts with employers, they should be integrated in the UEBMI,
otherwise, rural migrants may enroll in URBMI of their actual residence (their working places) orin the new CMS of their origin rural areas (National Development and Reform Commission 2009).
The progress, however, appears to be mixed, because integrating rural migrants into the urban
insurance programs requires the initiative of employers or local governments (cities) who provide
contributions to the insurance funds. In some industrialized areas/cities, enterprises have faced
lower labor supply in recent years. It has been noted that such enterprises tend to enable rural
migrants to enroll in UEBMI as a welfare benefit. 8 Such movement will be conducive toincluding rural migrants in the urban insurance program. The movement, however, is still limited
in certain areas, such as the Pearl River delta area. In addition, no city has actually included rural
migrants in its urban insurance program; only a few cities have introduced some other insurance
programs to rural migrants (OECD 2010). These two factors, namely the segmentation of
insurance programs based on the hukou system and the scheme restricting insurance benefits tolimited areas, still hinder rural migrants and certain other people from obtaining insurance
benefits.
Another concern is the level of insurance benefits. This also relates to other issues: thedisparity in the benefit level between the three insurance programs, and the disunity of insurance
schemes between localities. As mentioned above, the funding sources for the UEBMI are
premium contributions both by employers and employees, whereas those for new CMS andURBMI are household/individual premium contributions and governments’ subsidies. The
insurance benefits also vary among the three insurance programs; these vary not only among theinsurance programs but also among localities. The central government presented the grand designof the insurance programs, and allowed cities or counties to modify the grand design in actual
implementation of the insurance programs. Hence, every locality has its own insurance scheme.
The UEBMI scheme is the most unified, and its benefits include both inpatient and outpatient care.
The new CMS and URBMI schemes are more diversified, but can be categorized into three types
8

According to the field research in Suzhou city conducted by Yamaguchi (Institute of Developing Economies, IDE-JETRO,Japan), some local enterprises attempt to provide better welfare conditions for rural migrants in order to attract them. This isbecause local enterprises face lower labor supplies (rural migrants), and local governments (cities) encourage enterprises toprovide rural migrants with better welfare conditions.

136

(refer to Table A1 in the Appendix for details of the scheme). All types of insurance schemes
include both inpatient and outpatient care in the insurance benefits. However, the benefits are
skewed heavily toward inpatient care, and the benefit level for outpatient care is considerably low.
In addition, it is pointed out that the planned benefit level differs from the actual benefit level,
which is less than 30 % even for inpatient care because of limited insurance funds (OECD 2010).
4. Financing Health Systems9
4.1 Transition of health expenditure structure
After the economic reform, the health systems declined in both urban and rural areas. In theearly 1990s, about 80% of the population was uninsured in China (World Bank 1997). As a result,individuals came to bear considerable portions of the financial costs of obtaining health careservices. The individual expenditure on health (out-of-pocket payment: OOP) as a percentage of
total health expenditure (THE) had increasingly expanded since the late 1980s, and it reached
60% of THE in 2001 (Figure 5: OOP as % of THE). Such a ratio of OOP to THE is high evencompared with other developing economies (Table 3). THE as a percentage of GDP also increased
over the period. On the contrary, government expenditure on health as a percentage of THE
continuously decreased over the 1990s, reaching about 15% in 2000, which is almost 10% lower
than the level in 1990 (Figure 5). The expansion of total health expenditure was mainly borne byindividuals’ payments (OOP) over the 1990s.

9This section is based on Uchimura (2009a, 2009b) and Uchimura and Jütting (2009), and the author revised and compiled
the contents.

137

Figure 5: Total expenditure and government expenditure on health, and Out-of-pocket payment

Source: Author’s compilation based on data from China National Health Accounts.
Table3: OOP as percentage of total health expenditure by developing regions
200 0

200 1

200 2

200 3

2004

N orth ern Afr ic a

4 7.7

4 6.0

4 6.9

4 6.3

47 .2

Sub-S ah aran Africa

5 0.3

4 9.4

4 8.5

4 6.9

46 .2

La tin America

3 8.2

3 8.5

3 6.9

3 6.3

35 .1

The Ca ribbea n

3 3.5

3 3.5

3 1.7

3 3.0

32 .3

Easter n As ia

5 7.5

5 8.4

5 6.4

5 4.6

52 .4

So uth ern As ia

7 1.8

7 3.2

7 3.9

7 4.7

74 .5

South-E astern Asia

5 3.2

5 2.3

5 1.7

5 2.2

51 .6

We ster n As ia

3 7.1

3 5.6

3 6.9

3 1.2

26 .9

Oc eania

1 2.5

1 1.4

1 1.3

1 1.0

10 .7

CIS E urope

4 0.9

4 2.0

4 0.9

4 0.7

40 .9

CIS A sia

5 6.6

5 5.2

5 6.4

5 4.9

53 .8

Source: Author’s compilation based on data from WHO Statistical Information System(WHOSIS). The regional groupings adopted here are those defined by ‘Millennium Development
Indicators: World and regional groupings’. The number of countries included in each region
depends on the grouping definition and the data availability. The calculated figures are138

population-weighted averages for each region. The population data used to calculate
population-weighted average is the data from 2005.
Such contraction of government health expenditure also had a critical impact on the
supply-side of the health system. As explained above, health institutions were funded through LIS
in urban areas and CMS in rural areas; however, in line with the progress of economic reforms,
such funding systems malfunctioned. At the same time, the government tightened its outlays forthe health sector. Consequently, health institutions came to rely on their own earnings, and havebeen almost commercialized. Regarding the price regulations, most health care services and a
portion of pharmaceuticals are regulated in China. The prices of general services are mostly set
much lower than the cost of provision. On the contrary, the prices of some services with high-techequipment, such as CT scans and X ray exams, are set substantially higher, some reaching morethan 50% of the cost of provision (OECD 2010). Regarding pharmaceuticals, hospitals areallowed to make a 15% (or 30% in some cases) mark-up over wholesale pharmaceutical prices.
Such price systems induce over-prescribing and excess-supply of high-tech and expensive healthcare services. Together with the commercialization of health institutions, such pricing systems
drive the costs to increase in the health sector.
Figure 6: Ratio of fiscal revenue to GDP and
Ratio of fiscal health expenditure to total fiscal expenditure (%)

Source: Author’s compilation based on data from the China Statistical Yearbook and China
National Health Accounts.
There were mainly two factors that affected decrease in government expenditure on health.
One was the decrease in total fiscal revenues, and the other was the decrease in the proportion of139

fiscal health expenditures to total fiscal expenditures. The proportion of total fiscal revenues to
GDP was reduced substantially in the first half of the 1990s, which means that fiscal revenues did
not increase in line with expansion of the economy (Figure 6). Such sluggishness of the fiscal
revenue generation was brought about by changes in the economic system and in operating
conditions of SOEs as well as by the intergovernmental fiscal relationships between central andlocal governments (OECD 2006, Wong and Bird 2008). Against that, as mentioned below, the tax
sharing system was introduced in 1994, and it was conducive to the increase in fiscal revenues,
particularly central government revenues (Naito 2004, OECD 2006). In fact, the ratio of fiscal
revenues to the GDP rebounded after the mid-1990s (Figure 6). On the contrary, the proportion of
fiscal health expenditures to total fiscal expenditures fell significantly after the mid-1990s (Figure6). This trend corresponds with the fact that the government tightened its investment in the healthsector over the period.
Since 2003, however, the government’s contribution to total health expenditures has
gradually expanded. The government’s attempt at health sector reform since the 2000s appears to
be reflected in the changes in fiscal expenditures for health. As detailed in section 5, thegovernment released new health system reform plans which include the fiscal outlay of CNY 850
billion (about US$125 billion) from 2009 to 2011. Such fiscal expenditures for health will further
change the health expenditure structure. In addition, how the fiscal funds are allocated in thehealth sector will significantly affect the outcomes.
4.2 Intergovernmental fiscal relationships for financing health systems
Local roles in expenditures and revenues
The intergovernmental fiscal relationship is highly decentralized in China witnessed by thehigh local share of total fiscal expenditures, which has a considerable impact on health inequality
between localities (Mei and Wang 2006). Table 4 shows that local governments finance about
70% of total fiscal expenditures. Such a large share of local government expenditures out of thetotal fiscal expenditures is exceptionally high, even compared with other economies around theworld (OECD 2006).10 In addition, local governments have further expenditure responsibility inthe health sector (Table 4).

10

The local expenditure proportion in China is higher than that in Canada or Germany where based on the federal system,
local responsibilities (sub-national governments’ responsibilities) are high. According to Fiscal Decentralization Indicators by
the World Bank, the proportion of sub-national expenditures to total fiscal expenditures is about 60% in Canada (1997 databasis), and about 40% in Germany (1998 data basis).

140

Table 4: Percentage of central and local government shares in fiscal revenue and expenditure

F isc al Re ve nu e

F i sca l Ex pe nd i ture

R ati o o f tra ns fer

O p era tin g E xp en se s forfr om c en tral to

H ea lth

tota l lo ca l
C en tral G ovt

Lo ca l G ov t

Ce n tr al G o vt

Lo ca l G o vt

C en tral G ov t

Lo ca l G o vt

1 99 3

21 .6

78 .4

27 .5

7 2.5

1 99 4

57 .7

42 .3

28 .9

7 1.1

1 3.3

2.2

9 7.8

4 7.4

2.2

9 7.8

1 99 5

54 .5

45 .5

28 .5

1 99 6

51 .8

48 .2

27 .2

7 1.5

4 2.5

2.0

9 8.0

7 2.8

3 8.7

2.0

9 8.0

1 99 7

49 .3

50 .7

1 99 8

49 .5

50 .5

22 .5

7 7.5

3 1.4

2.0

9 8.0

28 .9

7 1.1

4 0.0

2.1

1 99 9

51 .1

9 7.9

48 .9

31 .5

6 8.5

4 2.2

1.6

9 8.4

2 00 02 00 1

52 .2

47 .8

34 .7

6 5.3

4 2.1

1.5

9 8.5

52 .4

47 .6

30 .5

6 9.5

4 3.5

2.1

9 7.9

2 00 2

55 .0

45 .0

30 .7

6 9.3

4 6.3

2.7

9 7.3

2 00 3

54 .6

45 .4

30 .1

6 9.9

4 5.6

2.8

9 7.2

2 00 4

54 .9

45 .1

27 .7

7 2.3

4 6.7

2.6

9 7.4

re ven u es

Source: Author’s compilation based on data from the Finance Yearbook of China.
On the revenue side, a major milestone was the 1994 tax reform, known as the tax-sharing
system, in which the revenue side of the fiscal relationship was recentralized. This reform was
motivated by a decrease in fiscal revenues, in particular a decrease in the fiscal revenue of thecentral government (Bahl 1999, Wong 1997, Wong and Bird 2008). As presented in Figure 6, theratio of total fiscal revenues to GDP was 22% in 1985; however, by the mid-1990s, it had fallen
sharply to about 10%. The major purpose of the 1994 tax reform was to raise fiscal revenues,
achieve uniformity in the implementation of the tax structure, and create the tax assignment
system, providing incentives for improved tax effort (Bahl 1999). The ratio of total fiscal revenues
to GDP has gradually increased since 1996, and by 2006 had reached about 18% (Figure 2006).
Reforming the health system in China will require considerable fiscal investment. Taking
into account the intergovernmental fiscal relationship between central and local governments, thecentral government will need to provide substantial fiscal outlays for health system reform. The
central fiscal resources will also play an important role in improving health equity issues as wellas unification of insurance programs.
Intergovernmental fiscal transfers
While the revenue side was recentralized by the 1994 reforms, there was no change in the
expenditure responsibility alignment between the central and local governments (Ahmad et al.
2004). The local expenditure assignment was not consistent with the revenue capacity of local

141

governments (World Bank 2002). It generated a large fiscal gap for local (provincial)governments; that is, it widened the vertical imbalance (Ahmad et al. 2004). Such conditions
resulted in the provinces becoming significantly dependent on intergovernmental fiscal transfersfrom the central government (Wong and Bird 2008). In fact, the proportion of the fiscal transfersfrom central to local governments to the total local fiscal revenues jumped from less than 15% in
1993 to more than 40% in 1994 (Table 4).
Figure 7 presents the Gini coefficient, which captures the inequality level of the fiscal
revenues among local governments (provinces). The higher the Gini coefficient, the higher is theinequality. We find interesting differences in the Gini coefficient trends between local own
revenues and local total revenues. The local own revenue is the province’s own revenue, whereas
the local total revenue includes the province’s own revenue and the fiscal transfer from central tolocal (provincial) governments.11 The Gini coefficient level is higher in local (province) own
revenue than in local total revenue over the period, which means the disparity in the local own
revenue among provinces is larger than the disparity in the local total revenue. In addition, while
the disparity in the local own revenue has further expanded since the 2000s, the disparity in thelocal total revenue has decreased slightly since the 2000s. It indicates that the allocation of fiscal
transfers has become more redistributive.
Figure 7: Disparities among provinces: own revenues, total revenues, fiscal health expenditure

Source: Author’s calculation based on data from the Finance Yearbook of China.
The Gini coefficient level of local health expenditure is lower than that of local own
revenue; however, any steady trend in the level cannot be found (Figure 7). As mentioned above,
11

The provincial own revenue includes revenues of all tiers of local government below the provincial level, namely province,
prefectures, and counties. The fiscal transfer from the central to local governments includes the fiscal transfer to all tiers of
local government below the provincial level.

142the fiscal transfer from central to local governments has become distributed as reducing the
disparity in local fiscal capacities since the 2000s. However, such redistributive allocation of
fiscal transfers appears not to greatly affect the disparity in local health expenditures. Several
features of China’s fiscal transfer system might prevent the fiscal transfers from reducing the
disparity in local health expenditures effectively.
In introducing the tax-sharing system in 1994, the central government also introduced thetax-refund system. Based on local own revenue in 1993, the amount of local fiscal revenue fell in
1994 and afterwards, due to the introduction of the tax-sharing system, has been refunded by thecentral government (Naito 2004, Dabla-Norris 2005, OECD 2006). This system reduced theredistributive effect of the fiscal transfer from central to local governments on local fiscal
capacities; in other words, the tax-refund system weakens the equalization effect of the transfer on
the horizontal imbalance between local fiscal capacities (Dabla-Norris 2005, OECD 2006).
Though the fiscal revenue of the central government increased after the tax-sharing system wasintroduced, the central government could not initially use the increased revenue effectively toequalize fiscal capacities between local governments.
Another peculiarity of the fiscal transfer system in China is that nearly half of the fiscal
transfers from central to local governments are special-purposed (earmarked) transfers(Dabla-Norris 2005, OECD 2006). It is said that the earmarked transfers did not include many
health-purposes subsides, but mainly included subsidies for rural tax reforms, primary and middle
school teacher salaries, or civil servants’ salary increases (Mei and Wang 2006, Naito 2004,
OECD 2006). In addition, the Chinese government frequently provides earmarked subsidies on amatching-fund basis that requires co-financing by local governments (World Bank 2002, OECD2006). Such types of subsidy force local governments to allocate their own revenue forco-financing. Earmarked subsidies on a matching-fund basis change the allocation of local
government budgets. Moreover, if local governments cannot afford their share of the cost
(co-financing), they cannot receive the funds (earmarked transfers) (World Bank 2002).12 Thesefeatures of fiscal transfers from central to local governments may reduce redistributive effects on
local financing for health in China and may have a considerable impact on the outcomes of fiscal
health investment. An empirical analysis indicates that the effect on health resources of changes inlocal budget allocation due to local fiscal obligations for matching-funds is larger than that of
fiscal transfer allocated for health purposes (Uchimura 2009a). Earmarked transfers on amatching-fund basis decrease local government own revenues which can be allocated for theirown purposes because local governments must allocate their own revenues for co-financing. Sucha change in the allocation of local government budgets might reduce the overall effect of
12

The subsidy from the central government for the new CMS is also the earmarked transfer on a matching-fund basis. It has
been noted that localities that have better fiscal capacity had been assigned as pilot sites for the new CMS because assigned
localities must meet their obligations to co-finance the new CMS (Wang 2006). The experiences of other pilot projects of the
new CMS in poor provinces, such as Qinghai, Shanxi, and Gansu, indicated that a serious challenge for poor localities,
particularly for county governments, was to raise their own funds for sustaining the new CMS (Ministry of Health, Foreign
Loan Office 2002).

143

health-purposed transfers from central to local governments. If the central government aims to
improve health conditions in poor localities, it would be more effective to provide the local
governments with full subsidies than to provide them with matching-fund transfers.
5. Discussion
In this section, we discuss recent related policies in the context of health system reforms in
China. First, the new health system reform plan is the important policy package. Second, theurbanization policy and reforms in the hukou system will also have a critical impact on the healthsystem. Prime Minister Wen referred to the importance of the reforms at the 11th National People’s
Congress in March 2010.
The progress and actual design of the urbanization and hukou system reforms varyconsiderably between provinces because the central government allowed local governments totake the practical initiative in implementation. The overall trend of the reforms can besummarized as follows: 1) relaxing the requirements that non-farming rural populations have tomeet in order to obtain the formal urban residence, and including them in the social security
system in urban areas; 2) unifying the rural registration (the rural hukou) with the urban
registration (the non-rural hukou); and 3) abolishing the rural registration (the rural hukou). The
second and third points would serve to abolish the distinction between urban and rural registration
based on the hukou system either by unifying the rural hukou with the urban hukou or abolishing
the rural hukou. For instance, it is reported that Jilin province has been abolishing the rural
registration (the rural hukou) gradually since the beginning of 2010 (Xinhua News, 2 February2010). Such reforms will improve social security conditions for non-farming rural populations
inhabiting urban areas. In addition, the reforms would be also conducive to establishing a unified
insurance system at the country level, which is not segmented based on urban or rural registration(the hukou system). However, a critical concern is that the actual progress and implementation
schemes vary considerably among provinces. This means that the status of non-farming rural
populations in urban areas varies among provinces, which would further widen the healthdisparity between provinces.
With regard to health system reform, the new health system reform plan was released in
April 2009. The plan has five major targets: 1) broadening insurance coverage to 90% coverageby 2011; 2) establishing a national essential drug system; 3) improving medical care at the local
level (primary level); 4) improving basic public health services; and 5) launching pilot reforms of
public hospitals (National Development and Reform Commission 2009, Zhu 2009, Herd, Hu andKoen 2010). Broadening insurance coverage is an important challenge, but as examined in thispaper, other issues need to be addressed in order to make the insurance system work effectively.
The second target is to control the increase in total costs of pharmaceuticals, meet the need forbasic care, and ensure safety, quality, and affordability of the care. In this drug system, thepractitioner will be regulated to sell the listed drugs by the purchase price, and will receive a high144

percentage of reimbursement. This system regulates only a portion of pharmaceuticals. In thissense, it would effectively control a portion of the drug prices, but it would be rather doubtful
whether the system will reduce the overall costs. As mentioned, a reform in payment schemes forpractitioners within a hospital is also necessary in order to control total pharmaceuticals costs.
Regarding the third point, the emphasis is on the improvement of physical conditions andhuman resources at rural health facilities and urban local health facilities (community healthcenters). Such reform will improve the provision of primary health care both in urban and rural
areas, which will improve the population’s access to needed care. A challenge is how to financethe necessary funds for the reform. The central government needs to provide sufficient funds topoor regions in order to ameliorate the disparity in health between regions, and ensure access tobasic necessary care for the entire population. In addition, the government needs to set up a salaryscheme as well as career development systems for doctors working at the local facilities in order
to attract qualified practitioners. The fourth target is to improve preventive or screening services.
These services will be provided effectively in the reformed primary health institutions. The fifthtarget aims to restructure hospital management, and it stresses the importance of correcting thecommercialization of hospitals. For that purpose, it proposes increasing the fiscal investment inpublic hospitals.
This reform plan indicates that the fiscal outlay of CNY 850 billion (about US$125 billion)
will be provided from 2009 to 2011, which will be financed both by central and local governments.
Local governments are expected to provide 60% of the funds (Herd, Hu and Koen 2010). As
discussed above, local governments have considerable responsibilities for fiscal expenditures, andin particular for fiscal health expenditures, in China. Fiscal capacities of local governments,
especially lower-tier of local governments (counties), vary between localities. To improve thehealth disparity in China and ensure access for the entire population to needed care, the central
government needs to take a substantial initiative in reforming the health system. The central
government needs not only to present the grand reform plan, but also to provide the practicaldesign of the new health system, covering the entire country, and necessary financial supports.

145

Appendix
Table A1: Summary of China’s Insurance Programs
Insurance
programPremium

Insurance fund Medical account (MA) Enrollment unit

Employ er,

Pool at city

Employ ee

lev elUrban
Employ ees'
Basic Medical
Insurance
Urban
Basic Medical
Insurance

Inpatient
The indiv idual

Deductible,(the indiv idual)

Co-pay ment
Outpatient from MA

Subsidy of central
and local gov ts,
the indiv idual

Pool at city
lev elInpatient(a)

The indiv idual(a)(URBMI)Ty pe 1: none
Subsidy of central
New CMS

User fee

Employ ee(UEBMI)
Residents'

Benefits

and local gov ts,
Household

Pool at county
lev el

Ty pe 2: none

Ty pe 3: the indiv idual

Co-pay ment,(a)Inpatient

Co-pay ment,

Outpatient (b)Deductible (b)Inpatient

Co-pay ment,

Outpatient (c)Deductible

Inpatient

Co-pay ment,

Outpatient from MA

Deductible

HouseholdHouseholdHouseholdSource: Author’s compilation based on information from the Decision of the Establishment of the
Urban Employee Basic Medical Insurance Program (1998), The View on the Pilot Programs on
the Urban Resident Basic Medical Insurance Program (2007), The Notice of the Establishment of
New Cooperative Medical Scheme (2003), Wagstaff et al. (2009), and OECD (2010).
Note:(a) It is not clear whether a medical account scheme is applied in any URBMI scheme.
Accordingly, it is not clear whether this program includes reimbursement for the expenditureof outpatient care.
(b) The expenditure for outpatient care is reimbursed with the deductible that increases with thelevel of the hospital.
(c) The reimbursement for the expenditure of outpatient care is limited to selected chronic
diseases.

146

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