Solutions to China’s Solutions to China’s Healthcare and Healthcare and

Environmental problemsEnvironmental problems

Gregory C Chow Gregory C Chow

Princeton University Princeton University

June, 2008June, 2008

OutlineOutline

1. Introduction

2. China’s healthcare system

3. Supply per capita remained constant and how

to increase it.

4. Economic approach to environmental problems

5. How to improve the regulation of pollution

6. Conclusions

1. Introduction1. Introduction

This lecture shows how simple economic This lecture shows how simple economic analysis can be applied to solve important analysis can be applied to solve important social problems.social problems.

The two examples are China’s healthcare The two examples are China’s healthcare provision and China’s environmental provision and China’s environmental protection.protection.

Even if the presented proposals to solve Even if the presented proposals to solve the two problems are effective if adopted, the two problems are effective if adopted, to get them adopted is not easy and to get them adopted is not easy and depends on political factors.depends on political factors.

2. China’s Health Care System 2. China’s Health Care System §§Institutions before 1980’sInstitutions before 1980’s

A cost-effective three-tear health care system A cost-effective three-tear health care system

improved the health of the Chinese people: improved the health of the Chinese people:

..reduction of diseasesreduction of diseases

..decline in the annual death ratedecline in the annual death rate 17 per 1000 population in 1952→6.34 per 1000 in 198017 per 1000 population in 1952→6.34 per 1000 in 1980

..increase in life expectancyincrease in life expectancy early 1950s: 40.8 years→ early 1960s: 49.5 years → late 1970s: early 1950s: 40.8 years→ early 1960s: 49.5 years → late 1970s:

65.3 years65.3 years

2. China’s Healthcare system 2. China’s Healthcare system sincesince1980’s1980’s

RuralRural: :

..Privatization of farming led to the disintegration of public Privatization of farming led to the disintegration of public

health provided collectively under the Commune systemhealth provided collectively under the Commune system..

UrbanUrban: :

..Privatization of state-owned enterprises was a very slow Privatization of state-owned enterprises was a very slow

process that took over two decadesprocess that took over two decades. .

..The government tried to provide a substitute for the public The government tried to provide a substitute for the public provision of health care through the state-owned provision of health care through the state-owned

enterprisesenterprises..

22. Data on expenditures for healthcare. Data on expenditures for healthcare

YearYearTotal Total (100 (100

million)million)

Government Government BudgetaryBudgetary

Social Social ExpenditureExpenditure

ResidentResidentIndividualIndividual

Percent Percent GovernmenGovernmen

tt

Percent Percent IndividualIndividual

19951995 2257.82257.8 383.1383.1 739.7739.7 1135.01135.0 17.017.0 50.350.3

19961996 2857.22857.2 461.0461.0 844.4844.4 1551.81551.8 16.116.1 54.354.3

19971997 3384.93384.9 522.1522.1 937.7937.7 1925.11925.1 16.416.4 52.852.8

19981998 3776.53776.5 587.2587.2 1006.01006.0 2183.32183.3 16.016.0 54.854.8

19991999 4178.64178.6 640.9640.9 1064.61064.6 2473.12473.1 15.815.8 55.955.9

20002000 4586.64586.6 709.5709.5 1171.91171.9 2705.22705.2 15.515.5 59.059.0

20012001 5025.95025.9 800.6800.6 1211.41211.4 3013.93013.9 15.915.9 60.060.0

20022002 5790.05790.0 908.5908.5 1539.41539.4 3342.13342.1 15.715.7 57.757.7

20032003 6584.16584.1 1116.91116.9 1788.51788.5 3678.73678.7 17.017.0 55.855.8

§§Health Care Expenditures and Health Care Expenditures and Funding ResourcesFunding Resources

Health Care Expenditure

0

1000

2000

3000

4000

5000

6000

7000

1995 1996 1997 1998 1999 2000 2001 2002 2003year

100 million

total expenditure government budgetsocial expenditure resident individual

Time-Series Data on Aggregate Demand for Health Care

YearYear CPICPI GDPGDP Price Price index of index of healthcare healthcare prpr

Quantity of Quantity of healthhealth services services q q = exp/pr= exp/pr

19951995 3.0283.028 58478.158478.1 1.0001.000 2257.82257.8

19961996 3.2793.279 67884.667884.6 1.1241.124 2542.02542.0

19971997 3.3713.371 74462.674462.6 1.3811.381 2451.02451.0

19981998 3.3443.344 78345.278345.2 1.6191.619 2085.52085.5

19991999 3.2973.297 82067.582067.5 1.8081.808 2311.22311.2

20002000 3.3103.310 89468.189468.1 2.0092.009 2283.02283.0

20012001 3.3333.333 97314.897314.8 2.2202.220 2263.92263.9

20022002 3.3063.306 105172.3105172.3 2.4022.402 2410.52410.5

20032003 3.3463.346 117390.2117390.2 2.6162.616 2516.92516.9

3. Supply of Health care per capita 3. Supply of Health care per capita remained constantremained constant

1989 1997 2002 2006 1989 1997 2002 2006 #hospital #hospital Beds/10,000 22.8 23.5 23.2 25.3Beds/10,000 22.8 23.5 23.2 25.3 # doctors # doctors per 10000 15.6 16.5 14.7 15.4per 10000 15.6 16.5 14.7 15.4

The amount of health care supplied per capita remained The amount of health care supplied per capita remained approximately constant between 1989 and 2003 (as also approximately constant between 1989 and 2003 (as also seen by the quantity q = total healthcare expenditure / seen by the quantity q = total healthcare expenditure / price index of health care service in Table 2).price index of health care service in Table 2).

Reason for supply to remain Reason for supply to remain constantconstant

The Chinese Constitution of 1982 The Chinese Constitution of 1982 stipulates that the provision of healthcare stipulates that the provision of healthcare is the responsibility of the government. is the responsibility of the government. The stipulation gives less room for private The stipulation gives less room for private participation than the case of education.participation than the case of education.

The central government assigned the The central government assigned the responsibility to local governments which responsibility to local governments which often do not have the financial resources often do not have the financial resources nor incentive to increase supply. nor incentive to increase supply.

A simple solution to increase supplyA simple solution to increase supply

A simple solution is for the government to allow and encourage A simple solution is for the government to allow and encourage private or “people-operated (minban)” hospitals and healthcare private or “people-operated (minban)” hospitals and healthcare centers.centers.

In 2004 the government has begun to allow some hospitals in In 2004 the government has begun to allow some hospitals in urban and rural areas to be run privately to reduce the burden to urban and rural areas to be run privately to reduce the burden to the government but allowing and encouraging the establishment the government but allowing and encouraging the establishment of more private hospitals, thereby increasing competition to of more private hospitals, thereby increasing competition to public hospitals, is essential for increasing both the quantity and public hospitals, is essential for increasing both the quantity and quality of healthcare in China. quality of healthcare in China.

There may be inertia for local government health officials to There may be inertia for local government health officials to resist this suggestion for it may interfere with their authority and resist this suggestion for it may interfere with their authority and make their job more difficult. Higher officials in the government make their job more difficult. Higher officials in the government may not be willing to make such a change for fear of rocking the may not be willing to make such a change for fear of rocking the boat.boat.

Personal experience in making this suggestion to government Personal experience in making this suggestion to government officials.officials.

Experience of Suqian CityExperience of Suqian City Experience of Suqian City with 5 million Experience of Suqian City with 5 million

population located in northern Jiangsu province in population located in northern Jiangsu province in 2001-2004 to allow privately operated hospitals 2001-2004 to allow privately operated hospitals and clinics demonstrated success of this solution.and clinics demonstrated success of this solution.

Skeptics insist that hospitals and clinics should be Skeptics insist that hospitals and clinics should be operated by the government. The solution allows operated by the government. The solution allows for government operated hospitals but opens the for government operated hospitals but opens the door for privately operated hospitals.door for privately operated hospitals.

The experience of China’s successful open-door The experience of China’s successful open-door policy demonstrated the usefulness of allowing policy demonstrated the usefulness of allowing foreign competition to stimulate and improve foreign competition to stimulate and improve government operated enterprises.government operated enterprises.

Government’s program to pay for healthcareGovernment’s program to pay for healthcare– a different problem from increasing supply– a different problem from increasing supply

"Decision on Health Reform and Development by the "Decision on Health Reform and Development by the

Central Party Committee and State Council." (January Central Party Committee and State Council." (January

15, 1997) 15, 1997)

Basic objective : to insure that every Chinese will have Basic objective : to insure that every Chinese will have

access to basic health protection. access to basic health protection.

Rural : to develop and improve CMS through education, Rural : to develop and improve CMS through education,

by mobilizing more farmers to participate and gradually by mobilizing more farmers to participate and gradually

expanding its coverage; 40 yuan subsidy per person.expanding its coverage; 40 yuan subsidy per person.

UrbanUrban ：： a basic medical insurance system was a basic medical insurance system was

established in 1998, financed by 6established in 1998, financed by 6 ％％ of the wage bill of of the wage bill of

employing units and 2employing units and 2 ％％ of the personal wages. of the personal wages.

§§ Possible Alternatives in the Possible Alternatives in the Management of Health Care Management of Health Care

Medical insurance in urban area mainly for illnesses with Medical insurance in urban area mainly for illnesses with

large expenses. No insurance or high co-payment for large expenses. No insurance or high co-payment for

ordinary illnesses requiring small expensesordinary illnesses requiring small expenses

Incentive payment for physicians in public hospitalsIncentive payment for physicians in public hospitals

Leasing of public hospitals for private management Leasing of public hospitals for private management

without changing existing subsidieswithout changing existing subsidies

Encouraging establishment of private hospitalsEncouraging establishment of private hospitals

Four environmental problemsFour environmental problems

Economic activities of production and Economic activities of production and consumption require the use of energyconsumption require the use of energy

Use of energy creates environmental Use of energy creates environmental problems of problems of

1. Air pollution1. Air pollution 2. Water pollution2. Water pollution 3 CO2 emission that causes global 3 CO2 emission that causes global

warmingwarming 4. Possible future energy shortage4. Possible future energy shortage

Economic view to environmental Economic view to environmental problemsproblems

Economics deals with the efficient use of Economics deals with the efficient use of resources. “Being efficient” means getting as resources. “Being efficient” means getting as much output or utility as possible given the same much output or utility as possible given the same resources.resources.

Environment is “natural capital” and an important Environment is “natural capital” and an important resource for production and consumption, similar resource for production and consumption, similar to physical capital and labor that are used for to physical capital and labor that are used for production.production.

Historically environmental resources were Historically environmental resources were plentiful and waste in its use does not affect plentiful and waste in its use does not affect efficient use of resources.efficient use of resources.

In recent years environmental resources are no In recent years environmental resources are no longer as plentiful and the extensive use of them longer as plentiful and the extensive use of them has created environmental problems. has created environmental problems.

Market solution to environmental Market solution to environmental problemsproblems

Condition for efficient allocation of resources is violated if Condition for efficient allocation of resources is violated if producers do not pay for the cost of some resources, producers do not pay for the cost of some resources, leading to waste in using these resources.leading to waste in using these resources.

If the producers do not pay for the cost of emissions they If the producers do not pay for the cost of emissions they will pollute too much.will pollute too much.

An obvious solution to this problem is to design a scheme An obvious solution to this problem is to design a scheme for the people responsible for pollution to pay for the cost of for the people responsible for pollution to pay for the cost of their action (emission of pollutants).their action (emission of pollutants).

If the consumers were given property rights to natural If the consumers were given property rights to natural resources (air and water) and could charge the cost of resources (air and water) and could charge the cost of emission to the producers, the natural resources would not emission to the producers, the natural resources would not be abused.be abused.

The above “market solution” is often not feasible because it The above “market solution” is often not feasible because it is difficult to assign property rights to the consumers. is difficult to assign property rights to the consumers. However I will suggest an institutional arrangement below However I will suggest an institutional arrangement below for the government to act on behalf of the consumers to for the government to act on behalf of the consumers to achieve an efficient allocation of natural resource.achieve an efficient allocation of natural resource.

Four components in the solution for Four components in the solution for regulating pollutionregulating pollution

(1) For each case of air or water pollution the local office of (1) For each case of air or water pollution the local office of the Ministry of Environmental Protection issues a fixed the Ministry of Environmental Protection issues a fixed number of emission permits per quarter. Each polluter is number of emission permits per quarter. Each polluter is required to report the amount of pollution during the required to report the amount of pollution during the quarter and to pay for a number of permits equal to the quarter and to pay for a number of permits equal to the amount of pollution reported. amount of pollution reported.

(2) Given the number of permits issued, demand by (2) Given the number of permits issued, demand by polluters will determine the price per permit. The polluters will determine the price per permit. The Administration’s local office will first set an initial price for Administration’s local office will first set an initial price for the permits. If the price is too low, the permits will run out the permits. If the price is too low, the permits will run out and some polluters need to purchase them from others. If and some polluters need to purchase them from others. If the initial price is too high, there will be unsold permits and the initial price is too high, there will be unsold permits and the local office will lower the price until all permits are sold. the local office will lower the price until all permits are sold.

Four components in the solution for Four components in the solution for regulating pollution - continuedregulating pollution - continued

(3) In determining the number of permits to issue (3) In determining the number of permits to issue in each local area affected by the pollution, the in each local area affected by the pollution, the local office solicits and respects suggestions from local office solicits and respects suggestions from the directly elected village heads in rural areas the directly elected village heads in rural areas and the directly elected representatives in urban and the directly elected representatives in urban areas. This is a way to give property rights of air areas. This is a way to give property rights of air and water to the citizens.and water to the citizens.

(4) The revenue received from the permits will be (4) The revenue received from the permits will be returned to the local government of the area returned to the local government of the area affected. Under the proposal the local residents affected. Under the proposal the local residents through their representatives and the local through their representatives and the local government will have an incentive not only to government will have an incentive not only to determine a suitable amount of permitted determine a suitable amount of permitted pollution but to help enforce the amount.pollution but to help enforce the amount.

ConclusionsConclusions I have demonstrated that simple economic ideas can be I have demonstrated that simple economic ideas can be

applied to solve important economic problems and illustrate applied to solve important economic problems and illustrate this point in the case of provision of healthcare and the this point in the case of provision of healthcare and the regulation of pollution in China.regulation of pollution in China.

Additional steps are required to put these ideas into Additional steps are required to put these ideas into practice as I have discussed in an article published in the practice as I have discussed in an article published in the May 2008 issue of Hong Kong Economic Review Monthly May 2008 issue of Hong Kong Economic Review Monthly entitled “From Research to Social Change.” These steps entitled “From Research to Social Change.” These steps include working through the government and outside the include working through the government and outside the government but are beyond the scope of my lecture today. government but are beyond the scope of my lecture today. Working outside the government includes spread the ideas Working outside the government includes spread the ideas to the public as I am trying to do today.to the public as I am trying to do today.

THANK YOUTHANK YOU