10 of 23 percent) and insurance reimbursements (15 percent annual growth). Although there are no available time series utilization data, the need for most health institutions to earn revenues sufficient to cover operational costs and some capital costs has almost certainly resulted in provider-encouraged consumption of those health services on which a profit can be earned. The pricing of health (and particularly hospital) services, coupled with the knowledge that for most of the insured population, no monetary cost will be borne for these services, has encouraged health care providers to offer more services, and services with a greater margin betw -en price and marginal cost.

**Res- Arce** allocation and **referral.** Another consequence of the incentives of the financial decentralization reforms in China is that government health expenditures, and to a much greater extent total health expenditures, have been increasingly devoted to higher level hospitals, while a decreasing share has been devoted to lower level hospitals. Data on government health expenditures show that the higher level hospitals' share rose from 38 percent in 1980 to 44 percent in 1987, while basic hospitals fell from 23 to 17 percent over the same period. Although anti-epidemic and maternal/child health activities remained around 17 percent of public expenditures, the growth in the percentage of total health expenditures financed by fees and insurance (from 72 percent in 1980 to 81 percent in 1987), and the preponderance of fee/insurance payments devoted to hospital services meant that the share of total health expenditures devoted to tasic and preventive services undoubtedly fell over the period.

The insurance programs do not exercise any influence to steer their beneficiaries to appropriate levels of the referral network. The lack of effective referral systems has resulted in fee paying (and especially insured) patients seeking care from higher level facilities when less complex facilities would have been sufficient. To the extent that future investment decisions are based on (distorted) historical utilization trends, too great a share of the public investment budget will be devoted to higher level hospiials. Current distortions, therefore, not only impose short run costs in terms of cost ineffective utilization but also long run inefficiency via investment decisions based on current patterns of facility demand.

**Medical** technology **incentives.** Hospitals negotiate fees for new technological services with local health and pric- bureaus, typically on the basis of the likely "average cost" of the service and assumptions regarding the volume of services likely to be provided. Accordin-g to the World Bank study, when hospitals are engaged in the price setting negotiations, they have an incentive to project moderate levels of utilization, but after the price is established, they have a powerful incentive to use the service intensively to generate financial profits. Case studies of the service costs and prices charged for specific technologies show there to be strong non-medical incentives to provide several services, including electroencephalography, coronary care, CT scans, ultrasound, and renal dialysis.

Pricing policy for drugs has led to a _defacto_ subsidy for the domestic pharmaceutical industry by the health system, and particularly the insurance systems, whicb merely reimburse providers without any efforts to monitor the cost-effectiveness of utilization patterns. The effects of the incentives to overprescribe are reflected in an average of 2.3 drugs prescribed per patient visit and by the nearly 50 percent of total health expenditures going for drugs. This is not just a financial problem; polypharmacy is clearly contrary to sound medical practice and can have deleterious health effects.

**Access and equity.** The combination of high user fees and insurance coverage for only part of the population has resulted in an inequitat -pattern of health care utilization wherein the provision