resource allocations in China. In particular, we study to what extent public resource allocations have remained correlated with the local GDP per capita, and how and why local health outcomes have changed in this context. We also include information on governance issues pertaining to health sector funding allocations, and conclude with our perspectives on how China’s HSR provides an opportunity for improving governance in public sector financing in and beyond the health sector.

# **2. Disparity in health resource allocation across administrative levels**

_Burgeoning inequity despite national government initiatives_ Health financing in China is decentralized across five levels of government (Figure 1) and the public contribution is largely determined by local fiscal capacity. (9) Local governments, namely the lowest two out of the five tiers of government, bear the main responsibility for financing essential public services and their fiscal capacity differs widely across China even after adjusting for equalization transfers, which are formula-based grants by central government according to measures of expenditure needs and fiscal capacity cross localities.

The extent of inequality in public spending on health per capita across provinces has risen since 2001 (figures 2 and 2A). This is also true in other areas of public services, such as education in the period 2000-2008 (figure 3).

Another source of burgeoning inequity is that total health spending per capita within provinces is increasingly skewed toward urban areas (figure 4), where household income is higher.

Within provinces and also within prefectures, evidence suggests that inequity in spending on health is also rising. Examples of rising disparity across prefectures in Inner Mongolia and Shandong and across district levels in Jinan and Zhengzhou municipalities are shown in figures 5 – 6. (Annex A provides descriptive statistics. Graphs in Annex figures A1 – A3 show similar inequity in health spending at sub-national level.) A similar situation appears in government expenditure on education at both prefecture and sub-prefecture levels (Annex A figure A4).

At household level, the availability of public resources for health also differs across population groups according to their participation under the different health security schemes available in China. Figure 7 shows that since 2002, whilst China has introduced several major new schemes to benefit previously excluded population groups and make the allocation of public resources more equitable, the size of the allocations per capita is, as yet, far from equal. Similarly, in other social sectors, including old-age pensions and education, China has been introducing programs to target the poor trying to overcome the overall bias toward better off population groups. (10) Finally, catastrophic and out-of-pocket health expenditures continue to demonstrate considerable inequity in China. During 2003-08, as National Health Service Survey reports (11) show, incidence of catastrophic health spending among low-income households remained about 10 percent in rural areas and increased from 4 to 6 percent in urban areas (figure 8). Average out-ofpocket payment (after insurance reimbursement) for a single inpatient stay in 2008 was 50-70% of annual income per capita in rural areas, about twice the levels common in urban areas (figure 9). Moreover, to some extent, the funding increases for rural health care through the restored 3