outpatient as well as inpatient care in their RCMS schemes (19), generating incentives to providers to admit patients for ailments that could be treated more cheaply at home.

Out-of-pocket payments as a share of medical bills remain significantly higher for outpatient care compared to inpatient care in both urban and rural areas. The most recent National Health Services Survey (NHSS) (11) shows that in 2008, 33% of patients received partial reimbursement for outpatient care compared to 85% who received partial reimbursement (in the average amount of 35% of the medical bills) for inpatient care. This is confirmed by field research. Citizens’ scorecard survey shows that out-of-pocket payments as a share of medical bills remain significantly higher for outpatient care compared to inpatient care, and reach 84% of _monthly_ per capita income among patients in the poorest quintile (compared to about 11% in the richest quintile) for an average outpatient visit, and a staggering 140% of _annual_ per capita income in the poorest quintile (compared to about 10% in the richest quintile) for a single average hospitalization episode. (20)

# _Earmarking of vertical programs to promote equity may also be failing in some areas_

To implement national priorities, the central government has been circumventing the problem of resource allocation at local level by increasingly relying on vertical programs and earmarked specific purpose transfers (that are conditional, to incentivize sub-national governments, as opposed to general-purpose transfers that are unconditional to provide general budget support). As part of China’s HSR, six new public health initiatives (for hepatitis B vaccination of older children, folic acid supplementation, fluorosis prevention, cervical and breast cancer screening for rural women, cataract treatment, and rural water and sanitation initiatives) have been recently added to the hundreds of earmarked transfers already in existence in the health sector. Currently, the entire central government budget for the health sector consists of earmarked transfers (accounting for RMB 112 billion in 2009). Central government spending on health does not include any general-purpose transfers to benefit poorer localities. Although there are over one hundred earmarked transfers in the area of public health alone, their total allocation is relatively small compared to the overall inequities in public resource allocation on health between urban and rural areas, and between wealthy and poor, and eastern and western provinces. (21) In some areas of social sector spending, such as the programs to reduce maternal mortality and support 9-years of compulsory education, earmarked transfers have supported measurable improvements in outcomes. Figure 12 demonstrates a marked reduction in the ratio of maternal mortality in rural versus urban areas, from 2.6 in 1991 to 1.3 in 2009, with most of the reduction occurring since 2002 when subsidies for hospital delivery jumped up in poor rural areas. Earmarked transfers for basic compulsory education, complemented by close monitoring of student enrolments, have helped strengthen basic education across China. Similarly, earmarked transfers and intensive real-time monitoring have facilitated successful roll-out of the _dibao_ cash transfer scheme nation-wide.

The reliance on earmarked transfers for such programs, however, results in concerns about the sustainability of any observed improvements and the predictability of funding at the local level. Furthermore, the selection of programs for earmarked transfers may depend on sectoral agencies’ or local governments’ lobbying ability rather than to a rigorous assessment of needs. Moreover, local studies have revealed weaknesses in monitoring and, in some instances, low compliance in 5