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Understanding How China's Health Care Reforms Pressure Local Governments Is Critical To Making A Good Investment Choice

Hana Brixi of the World Bank, Yan Mu and David Hipgrave of UNICEF China, and Beatrice Targa of UNICEF Timor-Leste published an excellent article in Health Policy and Planning's December 2012 issue, where they put forth an argument that regular readers of Asia Healthcare Blog will know I am fully on board with: the success of China's health care reforms is not going to be equally realized, and success, where it is found, will be directly related to local governments' ability to find creative ways to fund health care expenditures. Brixi et al.'s article, "Engaging sub-national governments in addressing health equities: challenges and opportunities in China's health system reform", is worth reading in full, but I just want to highlight it here and use it as a jumping-off point for the discussion that follows. First I present the abstract with my emphasis in bold:

China's current health system reform (HSR) is striving to resolve deep inequities in health outcomes. Achieving this goal is difficult not only because of continuously increasing income disparities in China but also because of weaknesses in healthcare financing and delivery at the local level. We explore to what extent sub-national governments, which are largely responsible for health financing in China, are addressing health inequities. We describe the recent trend in health inequalities in China, and analyse government expenditure on health in the context of China's decentralization and intergovernmental model to assess whether national, provincial and sub-provincial public resource allocations and local government accountability relationships are aligned with this goal. Our analysis reveals that government expenditure on health at sub-national levels, which accounts for ∼90% of total government expenditure on health, is increasingly regressive across provinces, and across prefectures within provinces. Increasing inequity in public expenditure at sub-national levels indicates that resources and responsibilities at sub-national levels in China are not well aligned with national priorities. China's HSR would benefit from complementary measures to improve the governance and financing of public service delivery. We discuss the existing weaknesses in local governance and suggest possible approaches to better align the responsibilities and capacity of sub-national governments with national policies, standards, laws and regulations, therefore ensuring local-level implementation and enforcement. Drawing on China's institutional framework and ongoing reform pilots, we present possible approaches to: (1) consolidate key health financing responsibilities at the provincial level and strengthen the accountability of provincial governments, (2) define targets for expenditure on primary health care, outputs and outcomes for each province and (3) use independent sources to monitor and evaluate policy implementation and service delivery and to strengthen sub-national government performance management.

My consulting company is currently engaged in negotiations with a sub-provincial government in China to provide health system restructuring services. I can't say any more than that because we have signed non-disclosure agreements. We were contacted because this particular local government is facing a dilemma, which I believe is typical of local governments during these health care reforms.

It has a certain budget that it has been allotted that must be spent on health care construction projects. This money must be spent by a certain period of time within the next two years. But the rub is that this sub-provincial government is not guaranteed any more money after the money it received to build the new health care development is spent, which means that it will have to figure out how to fund the operation of this new massive development through local taxation, petty fees, and, they hope (and this is where we come in) foreign investment. The problem is that this province which like most of China's provinces is not on the coast, likely doesn't have the growth potential needed for a sufficiently large enough tax base. This is where the dilemma really starts. It's the classic chicken and egg scenario.

The sub-provincial government could develop a tax base by bringing in foreign funds that would then go to actually making the health care development run the way its newness would suggest it could. But, because the local government is dependent on both taxes and petty rents (minor fees for routine administrative matters, participation fees for filling board seats that are otherwise unneeded, etc.) it is difficult to bring in foreign investment without some fundamental changes in how incentives for private businesses are aligned.

A remedy for this situation is for Beijing's Central Government or the provincial governments that allocate funds for use in health care systems to become better aware and more responsive to the dilemmas faced by local governments that have to simultaneously raise taxes to fund reform-mandated health care projects and attract the outside investment necessary to transform those construction projects into viable long-run institutions that provide great health care to the community. Maybe this adjustment would take the form of smaller annual construction targets, or guaranteeing a larger portion of local cadre salaries, or subsidizing the salaries and training of health care workers to a greater extent.

For foreign investors, it is important to be aware of this dynamic because it should shape the conversation that one has with local government leaders who are soliciting investment of funds. Knowing the down-the-road availability of government funds for a hospital, for example, can make a big difference on the initial decision to invest at all, but also on the decision of how much to invest, and, more importantly, what to ask for in return. In the pitches that we are currently making, the assumed policy and financial pressures of the local government party take center stage (i.e. "The goals of the reform for your province are X, and we understand the pressures involved in having to simultaneously construct a new building and fund a training program from local government coffers"). These questions are all the more pressing when one considers that the future of health care investment for non-HK, non-Taiwanese, non-Macao investors is the joint venture vehicle.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.