The Chinese experience of hospital price regulation

This paper analyzes the distortion effects of the hospital pricing policies in China. To help maintain equitable access to hospital services, the Chinese government regulates prices of hospital services, and provides subsidies to public hospitals. Comparing the regulated fees of selected hospital services with their average unit costs indicates that the average cost-recovery rate of the fees is only 50%. The fees for 90% of the services are less than their average unit costs, while the fees for the high-tech services exceed their costs. Moreover, the State Price Commission allowed a drug profit margin of 15-20% over the wholesale price. The distorted fee schedule affects the behaviour of hospitals. Empirical evidence revealed problems of violation of price regulations (charging a fee exceeding the regulated fee), over-provision of profitable high-tech services and over-prescription of drugs. The Chinese experience shows that low regulated fees cannot reduce the economic burden on patients, and that distorted medical fees can result in distorted service provision and low efficiency of medical resources. Strategies to correct for the price distortions are discussed.