Since 1980, China has achieved an average economic growth rate of ten percent and lifted 400–500 million people out of poverty. Yet between 1981 and 2009, life expectancy only rose from roughly 68 to 73 years. In countries that had similar life expectancy levels in 1981 but had slower economic growth thereafter - Colombia, Malaysia, Mexico, and South Korea, for example - life expectancy had increased by 7–14 years by 2009. Even Australia, Hong Kong, Japan, and Singapore, which had much higher life expectancy figures than China in 1981, rose by 7–10 years during the same period.
In the single-minded pursuit of economic growth, China’s leaders have long overlooked public health. After the Maoist health-care system began to collapse in the early 1980s, government spending on health as a share of GDP declined, from about 1.1 percent in 1980 to about 0.8 percent in 2002 (In the same year, the U.S. government spending on health accounted for 6.7 percent of GDP).
Dwindling government support, in conjunction with market-oriented economic reform, also changed the behavior of health-care providers. Public hospitals became revenue-making machines and began aggressively selling drugs and providing extra services to recoup losses caused by shrinking government support and fuel growth in revenues. Overall health expenditures increased rapidly at a time when there was virtually no social safety net: 87 percent of the rural population and more than 44 percent of urban residents had no health insurance of any kind. The growing costs had to be covered by out-of-pocket payments and by 1999 the private share of health-care spending exceeded 59 percent. In some cases, rising costs deterred the sick from seeing doctors. In 2004, the vice minister of health, Zhu Qingsheng, said that 60–80 percent of farmers who were seriously ill died at home because they could not afford care. Just a generation after Mao’s death, a 2000 World Health Organization report assessing health-care systems worldwide ranked China 144 out of 191 countries -- even though by then, China was already the sixth-largest economy in the world.
The 2003 SARS debacle jolted the Chinese government, highlighting the importance of balancing economic development and social services. In the wake of the crisis, the government invested tremendously in its capacity to tackle public health emergencies. A new round of reforms was formally kicked off in 2006 with a view toward providing, as President Hu Jintao put it, “safe, effective, convenient, and affordable” health-care services to everyone in China. At the beginning of 2009, China unveiled a three-year plan to pump at least $123 billion into the health-care sector by the end of 2011 (the figure was later increased to $173 billion), and a meaningful amount made it to rural areas.
Yet major problems remain. Mental illness is yet to figure high on the government’s reform agenda. Of the more than 26 million Chinese who suffer from depression, just ten percent receive any medical treatment. (There are only 20,000 psychiatrists in China, or 1.5 for every 100,000 people -- one-tenth the ratio in the United States.) And there are discrepancies in financing. The central government shoulders only about 30 percent of all public health funding. Local governments are supposed to finance the rest, but are not incentivised spend much on health care. Major urban hospitals are continuing to expand rapidly, and are draining resources from lower-level hospitals and hospitals in the countryside where the resulting shortage of personnel at rural hospitals is undermining the government’s efforts to upgrade rural and community-level health-care institutions.
Thus far, the government has made no serious effort to reform the administration of public hospitals, which account for nearly 70 percent of all hospitals in China. Instead of separating ownership and operations, officials at the Ministry of Health and their counterparts at the subnational level are at once the rule-makers, the regulators, and the general managers of all the public hospitals. This not only allows the government to meddle in the operation of hospitals but also makes it difficult for officials to play their role as independent and authoritative regulators of the health-care sector.
A combination of protected government administration and for profit revenue model has resulted in inefficient and corrupt profit-seeking monsters shielded by the government’s administrative power. Without adequate regulatory oversight, the hospitals’ revenue-making motives drive up total health-care costs. This in part explains why even though the rate of health-care coverage is now high, the level of benefits is still very low.
Equally important, China has failed to effectively address some significant risk factors, such as smoking, environmental degradation, unsafe drugs, and tainted food. More than 300 million people in China smoke today. Another 740 million are regularly exposed to second-hand smoke (including 180 million under the age of 15), an increase of 200 million over the past five years. Meanwhile, China’s cigarette production rose by 17 percent over the same period. Experts believe that China’s anti-tobacco policies are among the least effective in the world – something needs to change.
Pollution and other environmental problems, still marginal issues on the government’s health-care agenda, are harming people’s health as well. A study conducted in 2007 by the World Bank and the Chinese State Environmental Protection Administration found that 750,000 Chinese people die prematurely every year, mainly because of air pollution in large cities. According to the report, operations of 16 million companies and factories in China are poisonous or hazardous, and about 200 million workers are directly exposed to occupational hazards. Because of industrial pollution, especially water contamination in the countryside, there are 459 villages with an unusually high number of cancer patients.
Food and drug-safety problems are ubiquitous. Since 2006, China has been hit by a slew of scandals involving substandard foods and drugs - tainted milk, duck eggs, infant formula and vaccines. According to a series of public opinion surveys published in 2009, respondents ranked corruption, health-care reform, and food and drug safety as their top three concerns. Although the government has passed some measures to tighten regulations on product safety over the past few years, a string of scandals - over steamed buns dyed with dangerous chemicals, watermelons contaminated with growth accelerators, and pork products tainted with Clenbuterol - has renewed fears recently. Inadequate government oversight certainly is still to blame, but poor business ethics is a systemic problem.
In essence, China’s health crisis is predominantly a governance crisis, which the Chinese state is failing in terms of incentives, capacity, and effectiveness. In the hierarchical, authoritarian system, government officials are accountable to their superiors, not the general public. Any provision of public goods and services results not from an institutionalized negotiation between the government and the governed but from a unilateral grant by the government. And with the legitimacy of the government, both national and local, hinging on the delivery of steady economic growth, Chinese officials have little interest in promoting health care. Actions that are reinforced by multiple interest groups: the tobacco industry is resisting stricter controls and health-care providers have colluded to hijack the reform of public hospitals.
Health experts widely recommend that the government should take measures to limit risk factors, including tobacco use, lack of physical activity, alcoholism, and unhealthy diets. These cost-effective solutions will have meaningful investment implications beyond the healthcare sector: the food and agriculture supply-chain, clean air and water technology, alcohol and tobacco are all ripe for change. Health Insurance is another sector positioned for growth: in 2003 less than 70 percent of the population had some form of health insurance, by 2010 this reportedly rose to more than 94 percent, although cover is less comprehensive than in developed countries, covering only a small fraction of patient expenses.
Immediately within the healthcare sector it is prudent to analyse where companies are deriving revenue – companies supplying equipment and services through favorable agreements with local officials may be under threat. Investors should look for outcomes that address the governance problems crippling the health care system while keeping the communist party in power. These Pareto outcomes will be the sure winners.
Original Report by Foreign Affairs: https://goo.gl/uC09md
