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OO RUEHCN RUEHGH RUEHVC
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ZNR UUUUU ZZH
O 232243Z APR 09
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3634
INFO RHEHNSC/NSC WASHDC IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
RUCPDOC/USDOC WASHDC IMMEDIATE
RUEHOO/CHINA POSTS COLLECTIVE

UNCLAS SECTION 01 OF 03 BEIJING 001097 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USTR FOR STRATFORD 
TREASURY FOR OASIA 
 
E.O. 12958:  N/A 
TAGS: ECON SOCI CH
SUBJECT: CHINA'S HEALTHCARE REFORM/REBALANCING: 
PROGRESS, BUT WITH CAVEATS 
 
Refs: A. 
http://shs.ndrc.gov.cn/ygjd/ygwj/t20090408_27 1138.ht 
m 
  ¶B. 
http://shs.ndrc.gov.cn/ygjd/ygwj/t20090408_27 1137.ht 
m 
  ¶C. Beijing 580 
  ¶D. Beijing 693, Beijing 829, Hong Kong 421 
  ¶E. Beijing 422, Beijing 359 
 
¶1. (SBU) Summary:  China's blueprint for healthcare 
reform released on April 6 is being heavily promoted 
by the official media but will take years to 
implement and experts question whether it will 
address fundamental problems in China's healthcare 
system.  The plan is unlikely to improve trust in 
the healthcare system or to fundamentally change 
savings and spending behavior, particularly in the 
next few years.  The overall scheme aims for 
universal healthcare coverage by 2020.  In the 
initial 2009-2011 phase, China intends to invest RMB 
850 billion ($124 billion) in five broad reform 
areas: 1) basic healthcare insurance, 2) a national 
essential medicines program, 3) improvement of the 
rural health care service network, 4) elimination of 
the gap between urban and rural healthcare, 5) and 
continuation of public hospital pilot projects. 
Implementation will be difficult, and because 
Chinese will still be required to keep large 
discretionary savings to pay for health care 
contingencies, the plans are only a small first step 
in the direction of rebalancing towards domestic 
demand-driven economic growth.  End Summary. 
 
The Basic Blueprint 
------------------- 
 
¶2. (U) On April 6, the Government of China released 
a State Council "Opinion" on deepening healthcare 
reform as well as implementing guidelines for 2009 
to 2011 (see Refs A and B).  Together the two 
documents flesh out the Chinese Communist Party (CPC) 
Central Committee and the State Council health care 
system reform framework adopted on January 17, 2009, 
as well as plans announced at the 17th National 
People's Congress in March (See Ref C) to invest an 
additional RMB 850 billion ($124 billion) over the 
next three years.  The Central Government will 
invest RMB 331.8 billion and provincial and lower 
governments will cover the rest. 
 
¶3. (U) The Government's plan aims to repair China's 
healthcare system and achieve universal access to 
'basic' healthcare coverage by 2020.  The 
announcement on April 6 spells out five broad reform 
areas: 1) basic healthcare insurance, 2) a national 
essential medicines program, 3) improvement of the 
rural health care service network, 4) elimination of 
the gap between urban and rural healthcare, 5) and 
continuation of public hospital pilot projects. 
 
¶4. (U) Key features of the announced plan include 
the following: 
 
--(U) Government support for the construction of 
2,000 county-level hospitals and thousands of urban 
community clinics. 
 
--(U) Training sessions for village and township 
medical clinics and urban community medical centers. 
Specifically, China hopes to train 360,000 health 
care professionals for township health centers, 
160,000 for urban community health institutions, and 
1.37 million for village clinics in three years. 
 
--(U) Coverage of 90 percent of rural and urban 
residents with basic medical insurance by 2011.  By 
2010, subsidies to the Urban Residents' basic 
medical insurance (URBMI) and the New Rural 
Cooperative Medical Scheme (NCRMS) will be increased 
to RMB 120 (US$17.60) per person per year.  The 
maximum amount payable by the Urban Employees' Basic 
Medical Insurance (UEBMI) and URBMI will be 
increased to six times the annual average salary of 
local employees and disposable income of urban 
 
BEIJING 00001097  002 OF 003 
 
 
residents.  The maximum amount of the NRCMS will be 
increased to over six times per-capita net income of 
local farmers.  (Note: Given limited resources, 
there is still a role for commercial insurance 
providers to cover services not deemed 'basic' or 
exceeding the maximum amount payable by UEBMI, URBMI, 
and NRCMS.  Commercial insurance products are not 
part of the healthcare reform plan, and are mostly 
tailored to employees of large state owned 
enterprises and private companies, mostly in cities. 
End Note.) 
 
--(SBU) A list of national essential medicines will 
be released in early 2009.  The Implementation Plan 
includes provisions to incorporate the role of 
market forces in 'pushing forward mergers and 
restructuring of pharmaceutical manufacturing and 
distributing enterprises.'  Additionally, according 
to Dr. Li Yachan, the Deputy Division Director at 
the Department of International Cooperation of the 
State Administration of Traditional Chinese Medicine, 
it appears that traditional medicine treatments will 
comprise approximately 50 percent of the national 
essential medicines list. 
 
--(U)Increasing government regulation of medical 
services and prescribing practices to avoid over- 
prescription to fund hospital operations.  The 
Implementation Plan includes wording to increase 
public disclosure of hospital budget, expenditure, 
and revenue management information. 
 
The Gaping Hole: Funding for Public Hospitals 
--------------------------------------------- 
 
¶5. (U) The Government's plan calls for continued 
pilot projects to reform public hospitals.  In the 
key area of hospital funding, which underlies the 
problem of relying on drug sales and expensive 
diagnostic techniques, the plan calls for gradual 
changes to service charges, drug sales, and fiscal 
subsidies.  The goal is to make service charges and 
fiscal subsidies the primary channels for funding 
public hospitals. 
 
¶6. (SBU) This gradual approach, however, appears to 
avoid an aggressive effort to attack the root of the 
problem of hospitals and doctors using the sales of 
prescription medication and expensive tests to make 
up for budget and salary shortfalls.  (Note: In a 
web-poll conducted by sohu.com, 75 percent of the 
2,183 doctors surveyed earned an annual salary of 
less than 40,000 Yuan ($5,883). End Note.) 
 
An Important Step, but with Challenges Ahead 
-------------------------------------------- 
 
¶7. (SBU) The official media is portraying the plan 
as a historic move, and some local and international 
experts express the need for effective 
implementation.  Hu Wu, a rural social safety net 
expert at the Southwestern University of Finance and 
Economics in Chengdu, told Econoff that despite his 
reservations, the reform plan is still a good thing 
for farmers.  The number of rural families forced 
into poverty due to illness may drop, according to 
Hu, and with lower medical expenditures, they may 
feel at least a little bit more secure. 
 
¶8. (SBU) According to Hu, it will take time to set 
up clinics in every village and equip rural 
hospitals.  It will take even longer, according to 
Hu, to staff the facilities with qualified personnel 
and then get the system fully functioning.  Hu is 
also concerned that implementation may encounter 
wide-spread local corruption and resistance from the 
medical care sector and pharmacy industry.  He 
worries about corruption and embezzlement of Central 
Government funds used for the project.  Similarly, 
Peking University's Cai Hongbin expressed concern 
about the overall corruption of the existing 
healthcare and reimbursement system.  At the request 
of the Ministry of Health, Peking University has 
assembled teams to study ways to mitigate corruption 
and embezzlement. 
 
BEIJING 00001097  003 OF 003 
 
 
 
The Health Plan, Rural Consumption, and Rebalancing 
--------------------------------------------- ------- 
 
¶9. (U) In the official media Chinese academics argue 
that increased healthcare expenditures under the 
plan will help reduce precautionary savings, thus 
increasing domestic consumption, helping to 
rebalance the economy to rely less on exports and 
investment.  Official media reports that the plan 
will help reverse the trend in who bears the burden 
of medical costs, in which the share of personal 
spending on medical services has doubled from 21.2 
percent in 1980 to 45.2 percent in 2007, while 
Chinese Government funding has dropped from 36.2 
percent in 1980 to 20.3 percent.  (Note: This data 
is based on official records.  Because many doctors 
and hospital fees are paid covertly in 'red 
envelopes' (gratuities) directly by the patient, the 
proportion of private medical expenditures are 
likely even greater.  End Note.) 
 
¶10. (SBU) Hu told Econoff that the Government's 
health-care reform plan, even when thoroughly 
implemented, will NOT prompt farmers to consume more, 
particularly in the near future (see Ref D).  Hu 
surmised that the Government's reform plans, if well 
carried out, may make farmers less worried when 
seeking medical care for common illnesses, but care 
for serious or catastrophic illnesses will still 
require an expensive trip to county/municipal-level 
hospitals.  (Comment:  It is also common in China to 
seek treatment and care from the most renowned or 
'famous' doctors and hospitals even if adequate care 
can be obtained at a local clinic for substantially 
lower cost.  Establishing public trust in the 
community clinics after they are built and staffed 
will therefore remain a challenge. End Comment.)  Hu 
said this will still force rural residents to pay a 
lot out of their own pocket. 
 
¶11. (U) Further, although starting in 2010 the 
Government will raise annual subsidies for rural and 
urban residents to RMB 120, the insured still will 
have out-of-pocket expenses that might leave 
patients without appropriate coverage.  Most 
patients will also quickly hit the upper limit for 
reimbursements.  For farmers, especially those in 
poor areas with serious illnesses, the affordability 
gap will therefore remain large.  Hu said rural 
families are also burdened with costs for old-age 
care and the lack of a rural pension system. 
(Comment: Because the healthcare reform plan will 
only partially address the lack of trust in the 
rural healthcare system and other aspects of the 
social safety net remain weak, any increase in rural 
consumption will be small due to the need to 
maintain high precautionary savings. End Comment.) 
 
Comment: The Devil is In the Implementation Details 
--------------------------------------------- ------ 
 
¶12. (SBU) China's healthcare has suffered from 
reduced Government funding during the last 30 years 
of market reforms.  The Government plans released 
April 6 follow years of failed efforts to fix the 
system, as well as intense debate and repeated 
revisions to the current plan over the previous few 
years. 
 
¶13. (SBU) Difficulty implementing institutional 
reforms in rural China is particularly challenging 
(Ref E).  Constructing rural healthcare facilities, 
like other infrastructure and construction projects, 
poses less of a challenge than the more important 
task of staffing these facilities with qualified 
personnel and building a transparent, corruption- 
free system with appropriate incentives and salaries. 
Local governments are also expected to cover over 
half of the costs of implementing the plan, but lack 
of funding and weak institutional capacity at the 
local level may present a significant barrier to 
successful implementation. 
 
PICCUTA