Reforms over the past two decades have brought China’s health care system closer to a level of reliability and accessibility commensurate with the country’s new affluence. Notably, the consolidation of the fragmented health insurance system since 2009 ensured basic coverage for the entire population, driving a surge in utilization even as it halved the share of costs patients had to pay out-of-pocket. One consequence: a higher percentage of Chinese were admitted to hospitals in 2017 than in the average high-income OECD country.

The money came from a mix of central and provincial budgets, with higher central-government subsidies for lower-income provinces. Meanwhile, a governance reshuffle consolidated the purchaser role for social health insurance schemes under the newly created National Medical Security Administration, with most other functions assigned to a rechristened National Health Commission. China’s world-leading technological prowess in multiple fields spanning digital commerce to artificial intelligence — and accompanying innovative business models, such as WeDoctor, that have not yet been fully integrated into the health system — hold promise for supporting higher-quality and more convenient health care for China’s 1.4 billion people.

However, a host of challenges, from addressing patient-provider tensions and trust to changing provider incentives to promote value rather than volume and deciding which new medical therapies qualify as “basic,” remain to be dealt with. In broad terms, China must build an infrastructure that increases the efficiency of health care delivery as it expands quality and usage. Otherwise, the growth in outlays will simply not be sustainable in the long run. Here, I offer an overview of how the reforms are working and what’s left to do, with a focus on how to address the wide disparities in health and health care that reflect the yawning gap in living standards between China’s rising middle class and its poorest citizens.

Two Chinas

To understand China’s dramatic improvements and tortuous road ahead, begin by considering how various metrics of health and survival compare to high- and middle-income countries. The figures below plot life expectancy, infant mortality and under-age-5 mortality against per capita income.

The data allow us to compare China’s national averages with those of other countries and groups of countries. But it also permits us to disaggregate urban and rural China as ​if they were separate countries, which makes clear how wide the disparities are. “Urban China” consists of the four provinces (Shanghai, Beijing, Tianjin and Zhejiang) that did best by each metric, while “rural China” is the lowest four (Tibet, Xinjiang, Qinghai and Guizhou).

A few conclusions are inescapable. The 2013 gap in life expectancy between these proxies for urban and rural China — almost 10 years — is equivalent to the same life-span gap between high-income countries and middle-income countries (defined as those with less than $12,000 per capita income in terms of purchasing power). Similarly stark gaps are evident between rural and urban China in infant mortality and under-5 mortality.

The good news here is that these gaps have already narrowed substantially. For example, in 1990, the gap in life expectancy between the top and bottom provinces was 15.4 years; by 2013, it was 10.4 years. The average life expectancy in Shanghai and Beijing was 75.3 in 1990 — already higher than the year 2013 average life expectancy of 71.5 in the bottom four provinces. But life expectancy in these laggards increased by more than 11 years between 1990 and 2013, compared to an increase of less than seven years for Beijing and Shanghai.

Closing the Gap

Health outcomes differ along other dimensions, too — between urban regions with higher and lower per capita income and among individuals with more or fewer years of schooling. Another striking gap is in the burden of chronic disease. For example, diabetes is associated with greater excess mortality in rural China, although prevalence is higher in urban areas.

An important issue is the extent to which leveling public policy will ameliorate disparities, even as an array of social and economic forces push to widen disparities in health, health care use and burden of medical spending over a lifetime. Happily, some evidence does suggest that health investments can narrow the gaps in outcomes by compensating for health disadvantages, such as growing up in poverty.

Consider, for example, the correlation between educational attainment and better health. As multiple studies in different countries and populations have shown, part of this association is causal, and holds even when comparing people with the same income and wealth levels. In a study with several co-authors, I documented gaps in health — known as the educational gradient in health — between Chinese with high and low educational attainment, and how those gaps have changed over time.

China’s educational gradient might be expected to have become less steep in recent years for at least two reasons. First, those with little schooling may disproportionately benefit from investments in public health — clean water, infectious disease control — made during recent decades of the People’s Republic. Second, successive generations have received more schooling, along with its associated health benefits.

However, other changes would tend to steepen the educational gradient in health. For example, individuals with more schooling may better understand the importance of healthy lifestyles (such as not smoking) and find it easier to avoid the riskiest occupations. Those with more schooling may also be better equipped to prevent and manage chronic diseases — especially ones with relatively complex treatment regimens like diabetes that require adherence even when sufferers are asymptomatic. On balance, these latter effects seem to dominate. Based on data from two different nationally representative surveys, my co-authors and I concluded that higher educational attainment is associated with less smoking and drinking, more physical exercise, better self-assessed health and fewer medical conditions. Unsurprisingly, disparities in life spans are also substantial and have increased, primarily because those with high education enjoyed better survival.

In future decades, it will become even more important for China to address inequalities in health and education — and in the intergenerational transmission of human capital — because China’s development increasingly relies on innovation and pushing out the global technological frontier.

Inequalities in Health Care and Risk Protection

As noted earlier, China has attained universal health coverage and put in place policies to enhance access while decreasing households’ out-of-pocket spending burden. By no coincidence, utilization of services — especially hospital services — has greatly increased.

The relative decline in utilization of health care at the village level has been an unintended consequence, although one that’s easy to explain after the fact. With less of an out-of-pocket burden, patients self-refer to more trusted providers, swelling the ranks of those crowding into relatively modern hospitals. However, because the coverage of rural insurance (known as the New Cooperative Medical Scheme, or NCMS) is less generous than coverage for urbanites, the prospect of catastrophic medical spending on delayed care, when intervention is more likely to require hospitalization, remains higher for rural than urban residents.

The effective mergers of insurance risk pools — such as raising NCMS benefit levels to those of urban residents’ basic medical insurance — and implementation of catastrophic supplementary insurance within local social health insurance systems have tended to close gaps in risk protection. But the gap remains huge. In late 2018, urban formal-sector employees enjoyed health insurance benefits worth five times more than those going to rural residents.

Closing this gap while aiming to cover new life-saving therapies for all will confront China’s medical system with monumental financing headaches. Expanding and equalizing catastrophic coverage will be ever more important as medical technology continues to advance. Breakthrough therapies draw upon increasing biomedical knowledge and “precision medicine” or “personalized therapy” using genetic and other information, especially for cancers. And these therapies can be extremely expensive. Financing experts recommend that China explores the policies utilized in other middle- and high-income economies, such as expanding the tax base to include assets as well as income, as is done in the health systems of South Korea and Taiwan. Furthermore, financing long-term care for China’s aging population remains a distinct and critical issue.

In addition to expanding insurance coverage, China has put in place multiple policies to address health inequalities. Perhaps most salient: equalization of essential population health services (such as basic immunizations) as part of the 2009 national health reforms.

The importance has been highlighted in a variety of high-level leadership statements, which is key to translating policy rhetoric from Beijing into effective implementation across this gigantic nation. Planners might add some punch by creating more incentives for local political leaders to focus on the most vulnerable. For example, in some localities when health screening detects a low-income resident with serious problems requiring treatment, a team including both a local health care provider and a local government official are accountable for making sure that the individual receives care. To add more bite, local officials’ performance evaluations might be based in part on local health indicators.

All that said, there’s good reason to believe policies that go beyond direct medical intervention — notably, investments in the quantity and quality of schooling — can have even greater influence on health and survival than access to medical care. As already noted, these two dimensions of human capital are reinforcing. For example, less-educated individuals may be increasingly at a disadvantage in understanding the importance of adherence to medication regimens, dietary adjustments, regular checkups and other factors needed to manage chronic conditions. Today’s youth have received far more education and early-life health investments (nutrition, immunizations and so forth) than their parents and grandparents enjoyed, and should be encouraged to show filial piety by teaching the older generation about healthy lifestyles.

What goes around comes around. Educational disparities reinforce health disparities, with those achieving greater educational attainment able to command higher wages, achieve higher lifetime wealth and enjoy more security in retirement while still investing in their children. Healthy aging enables longer working lives and thus also helps to finance the health services that lead to healthy aging.

The new rural pension scheme fits in here. Although far less generous than urban schemes, it enables beneficiaries to take care of their own health needs a bit better and to be less dependent on sons and other adult children — perhaps even contributing to reduced mortality. Housing and infrastructure are also important for health. As China continues to urbanize rapidly, affordable housing that links access to community health services and affordable long-term care services remain challenges.

Chronic disease control and healthy aging

Now that infectious diseases are largely controlled, China’s primary burdens of morbidity and mortality arise from chronic diseases. Hence the focus of much of the effort to address health inequalities should be on chronic diseases. One important step would be a renewal of China’s commitment to tobacco control, the leading preventable cause of premature mortality. For example, using an earmarked increase in tobacco taxes to invest in health in rural China would be a win-win, compensating for the regressive nature of such taxation and perhaps helping to close the longevity disparity between men and women as well. (Today, life expectancy for women is almost 6 years longer than that for men.)

Strengthening China’s primary health care system

China’s health policies have long supported prevention and primary care — that was most definitely the way to maximize the bang from an RMB. Yet, as noted above, during the past two decades, reforms have had the unintended consequence of promoting hospital-based care rather than cost-effective primary care. Of course, some increase in demand for hospital-based services was an almost inevitable outcome of the rising living standards of China’s households. But the pace of demand also reflects a broad distrust in the quality of primary care.

This distrust is not without foundation: well-trained physicians are in short supply. Despite efforts to train more general practitioners and enhance primary care, by 2017 only one in 10 rural doctors at township health cen-ters had at least five years of training. Systemic reforms are needed to right the imbalance.

Some areas (among them Shanghai) have for a decade or more been trying variations on a high-quality, primary-care-based treatment model, gradually gaining the trust of residents. Xiamen (a southern port with a population exceeding 5 million) has developed a team-based model that includes a health manager working with a general practitioner and any specialists the patients may need. This approach may expand, as tasks including record keeping, basic health service delivery, follow-up health education and care coordination are taken over by physician assistants, leaving the increasingly well-trained primary care physicians with more time to focus on clinical management.

Patients plainly want a quick and convenient channel for upward referrals to the urban specialists. Referral back down to primary care after inpatient treatment has been less systematic, although new forms of provider integration linked to global budgets have given incentives for hospitals to partner with community health centers in follow-up care. In fact, one of the metrics used by some integrated care systems in China is whether the number of downward transfers to primary care from hospitals is similar to or greater than the number of upward referrals for hospitalization.

China’s vibrant e-commerce and digital payment sectors have also been harnessed in preliminary ways to support population health and convenient medical care. In addition to the aforementioned WeDoctor, many local health authorities are also experimenting with smartphone apps to promote healthy lifestyles, self-management of chronic disease and adherence to clinical recommendations. And many are enriching the benefit package associated with signing up for a system that’s based on first contact at the primary care level. Such services include not only access to specialist referrals when needed but also ea-sier prescription refills, home-based care for the disabled and so on. Ultimately, it will be important to assess whether such programs do achieve greater convenience and lower cost without sacrificing quality.

Health data platforms and application of AI to health care offer many possibilities for deploying big data to support increasing “health span” (years of healthy life) in China. But they also must navigate patient privacy and data security issues, preventing records from being exploited for commercial purposes without individuals’ consent or official oversight. Here again, progress has been rapid, but many issues remain to be addressed.

Unfortunately, there is not yet much evidence about the impact of improving primary care. Nevertheless, there are solid common-sense reasons to believe that management of patients with hypertension and diabetes with better primary care may make a big difference. Yiwei Chen and policymakers from Zhejiang Province and I recently analyzed the impact (using 70,000 rural Chinese diagnosed with hypertension or diabetes) of a program that gives primary care physicians incentives to identify patients and enroll them in primary care management. We found that patients residing in a village within a township with more intensive primary care management of chronic disease had fewer specialist visits, fewer hospital admissions and lower inpatient spending. And they also adhered better to drug prescriptions.

Note here, too, an important win-win. A back-of-the-envelope estimate suggests that the savings from avoided inpatient admissions substantially outweighed the public subsidy costs of the program — even if we ignore the value of any associated improvements in survival and quality of life.

Incentives, Organization, Competition and Market Power

One tantalizing set of policy experiments in China involves health alliances or local integrated health care organizations created by formal mergers of local government-owned hospitals and primary care providers. The hope and expectation are that integration will yield better patient outcomes while slowing expenditure growth — though the research is not in yet to prove it. Such integrated care organizations usually unify the list of drugs available at different provider levels so that patients do not have to go to hospitals to get the drugs they need. The next frontier may be in expanding coordination of health services with long-term care services for the elderly and disabled.

In these integrated care system experiments, one challenge will be to find the correct regulatory balance. Strict, transparent regulation can be critical to uphold budget constraints and patient rights as well as to deter malfeasance. On the other hand, flexibility and autonomy are needed to promote innovation and can be well justified as long as the organization in question is accountable for results.

Sometimes the oversight and regulatory structures stand in the way of innovations of considerable social value. For example, controlling spending by constraining per-visit expenditures and per-admission spending may seem a no-brainer. But it can have unintended consequences, creating incentives for providers to require more frequent, low-spending visits, with shorter drug prescriptions and discouragement of the use of treatments that are expensive but promote longer-term treatment adherence and health. Simple metrics are no substitute for rigorous evaluations of whether reforms actually reduce the growth rate of overall medical expenditures.

Health care alliances appear promising in some respects, but their broad impact on health outcomes and on urban-rural disparities aren’t yet clear. Moving toward prepayment — such as a capitation fee system — does create incentives for prevention and investment in cost-effective management linked to primary care. Yet there is need for balance and careful monitoring because, as every health care manager knows, strong incentives to control expenditures also have important unintended effects, including risk selection (turning away expensive-to-treat patients) and/or under-provision (stinting on care or withholding innovative treatments even when appropriate).

Social tensions will also increase if only the rich can afford to “buy out” of under-provision by paying extra for better care. Hard-won trust in primary care also could be undermined from the opposite direction: rather than (or in addition to) doubting the technical competence of community health centers, patients may start to wonder if, in pursuit of lower spending, primary care providers will purposefully withhold referrals to specialists (or accept discharges from a hospital too early).

Moreover, integration of all government-owned providers in a given district or county in effect creates a local monopoly. In such a case, allowing patients the choice to go outside the district is one of the few remaining options for competitive incentives to provide good care at low cost. Although the role of competition in health care is controversial, relatively robust evidence suggests that patient choice leads to improvements in quality. Indeed, there’s a famous paper in health care research entitled “Death by Market Power,” showing that lack of competition can lead to higher mortality. Thus policymakers should be cautious in endorsing claims that local monopoly care organizations can better coordinate care and improve outcomes while controlling spending.

An integrated provider may excel by streamlining services, better coordinating care and investing in efficiency improvements — such as through centralizing procurement, logistics, human resources, and other operations — as well as promoting the appropriate site of care. However, new monitoring and evaluation systems will need to be put into place to make sure these local monopolies live up to expectations.

While it is true that market power arises in many health systems, they also have substantial safeguards in place. There is a social value of allowing patients to “vote with their feet,” even if that means providers cater to patient-observable dimensions of care and not technical quality of care. Evidence from the U.K., for example, clearly links competition for patients to hospital management quality.

When integrated networks or primary care providers must compete to attract patients with the services they provide, this offers a counterbalance to under-provision and gives policymakers a key feedback loop for monitoring whether providers are truly meeting people’s needs. The success of integrated networks in China will depend on how well policymakers achieve this balance.

The Long March

Creating a high-quality universal health care system is an immense challenge anywhere, let alone in a country as large and diverse as China.

But equal access to care will become ever more important as China converges on higher incomes, slower economic growth, an older age structure and dependence on a skilled, innovative workforce to approach OECD living standards. Experts across multiple domains have raised red flags about the pressing need for more robust health and retirement security systems and for protecting the most vulnerable, not only because it is the right thing to do, but also because the failure to do so will threaten social stability.

China simply cannot afford to live indefinitely with the dark side of rapid, market-driven development — the rural-urban, rich-poor schisms that undermine success by any metric. And thankfully, the process of catching up on one critical component of social justice — universal health care — has begun. The challenge now is to persist in an endeavor that requires flexibility, sensitivity to competing interests — and lots and lots of money.