## **_Well-intended price controls to make basic services universally accessible may have in fact_**

**_exacerbated these negative consequences_** .  In health, where information asymmetry is most significant, China’s own as well as international experience shows that providers of care raise the volume of care (for instance the amount of medicines prescribed) and substitute expensive diagnostics, services and drugs for cheap effective care in order to circumvent price caps and maximize their revenues.<sup>17</sup> This adds to the financial burden of healthcare shouldered by households and to all the negative consequences listed above.  Moreover, price caps may also distort the behavior of households.  The survey suggests, for instance, that water use efficiency is low particularly among the more affluent urban households.  If the price of water is subsidized regardless of the volume consumed, it is those who consume most, hence the affluent households, who benefit most from the subsidies.  Research suggests that the behavioral impact of price controls on both providers and households makes price controls regressive and anti-poor.<sup>18</sup>

**_Although national guidelines and standards exist, it has been largely the task for the municipal governments in China to strike a balance between public resource allocation, user fees, price controls and compensating transfers to poor households._** It has been also up to the municipal government to design the provider payment system so as to promote better performance in service delivery.

**_The report finds that cities are gradually reforming the local provider payment system._** The surveyed cities have been recently moving away from user fees and toward stronger public resource contribution in basic education and basic healthcare.  Several cities have been innovating the way providers are paid.  Shanghai-Pudong, for instance, has been pre-paying general practitioners in community health centers to enhance utilization and costeffectiveness of primary care.  Cities have been also gradually introducing a more realistic (reflecting the actual cost) and fair (reflecting the quantities used) pricing structure for utilities.  For the poor official urban residents, household transfers programs, which partly compensate for the increases in the price of utilities, have been strengthened.

**_Continuing improvements in the provider payment system are critical_** .  China’s own and international experience implies that an appropriate provider payment system and accountability mechanisms are more important for promoting effectiveness, efficiency, cost control and quality than ownership structures.<sup>19</sup>

# **_2.2 Accountability relationships for service delivery_**

**_Accountability relationships lie at the heart of the challenges in public service delivery_** .<sup>20</sup> (Box 4 briefly explains the term accountability.)  The study reveals that the objectives of

> 17  OECD (2002): _Health-Care Systems: Lessons from the Reform Experience_

> 18  Meng Qingyue et. Al _(2005)_ “The impact of China’s retail drug price control policy on hospital Expenditures” at _Oxford Journal_ or at http://heapol.oxfordjournals.org/cgi/reprint/20/3/185, and K Eggleston et al (2006), Health Service Delivery in China: A Literature Review, _World Bank Working Paper._

> 19 K Eggleston et al (2006), Health Service Delivery in China: A Literature Review, _World Bank Working Paper._

> 20 World Development Report (2004): _Making Services Work for Poor People_

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