In 1978, Deng Xiaoping began the economic reforms now referred to as “Gaige Kaifang,” through which China ushered in an era of unprecedented receptivity to foreign influence. The shift to liberalized trade policy led to reduced poverty levels and set China on the path to economic strength. But the reforms also catalyzed massive change within the formerly centralized medical system. Medicine is now the domain of the private sector and provincial and local governments, rather than the national government. While market reforms in the economy have been a boon for the Chinese, similar reforms in the healthcare system have improved quality but also created unequal access to healthcare due to rising costs.

While healthcare prices have risen over the past two decades, the number of hospitals in China has actually grown. In 1980, there were approximately 9,900 hospitals in China. As of 2005, there were about 18,700. A boom in the number of hospitals in such a short span speaks to the changing medical landscape in China. However, it also obscures the added costs that have come along with this seemingly positive change.

Chinese hospitals, especially in urban centers, increasingly rely on advanced medical technology. The increased importation of such technology, from MRIs to CT Scans and surgical equipment, along with the inevitable diffusion of such technology throughout Chinese hospitals, has certainly increased the efficiency and quality of medical practice. But rather than increasing competition and driving down costs, the introduction of free market reforms and improvements in the level of medical technology have had the reverse effect; they have actually driven costs, and prices for patients, up.

As the Chinese government continues to privatize healthcare, it is vital to understand the cause behind the seemingly paradoxical rise in medical costs. Economic reforms, if focused solely on economic policy and not tailored to specific sectors such as healthcare, can undermine a country’s medical system by creating increased disparity in medical services for the wealthy and the poor. There is no better example of this pitfall than today’s China. More importantly, and there is no real solution in sight. As medical costs for patients rise, expensive medical technologies continue to enter hospitals all over the country and push up costs even further.

William Hsiao of the Harvard School of Public Health attributes this phenomenon to new profit incentives that are reordering priorities for Chinese hospitals and medical practitioners. Profit incentives decrease physicians’ concern for providing affordable, accessible treatment and increase the pressure to use high-cost technology catered towards those who can pay for it. The contradictory coexistence of an economic boom and a healthcare gap presents a tradeoff for China’s policymakers. The government can either allow an American-style high-quality but expensive medical care system, or pursue a more egalitarian, but more regulated and inflexible system. Chinese policy towards the market for advanced medical devices reflects the government’s attempts to address this dilemma.

Laissez-Faire Healthcare

Under Mao Tse-tung’s government, Chinese healthcare was based on communal principles, wherein the state owned and operated aspects of the healthcare system. China’s Cooperative Medical System during the Cold War era ensured that even rural farmers had some access to healthcare, even if it came from barefoot doctors who were community experts in Western and traditional forms of medicine. Some of the accomplishments under the old system included a decline in infant mortality and a modest increase in life expectancy.

The barefoot doctor system would not survive the turbulent years of economic reform. The power struggle between economic liberals and hard-line communists created political turmoil in the early 1980s that shook the foundation of the government’s healthcare program. The economic liberals won out in the end, as Deng advocated a vision which would boost the economy and confidence in the government. The changes the healthcare system would have to undergo, however, were not clearly thought out, as Deng’s economic reforms soon took the front seat.

To become an economic power, China assimilated itself into the world economic system. It began collaboration with transnational manufacturers, participation in the World Trade Organization, and the use of advanced technological capabilities. The introduction of high-tech equipment into the medical system can perhaps be seen as an inevitable outcome of this economic modernization. In 2006, it was estimated that the medical equipment market (including domestic and imported products) was valued at US$13.7 billion. The US Department of Commerce estimates that the Chinese medical device market is growing at a rate of 10 to 15 percent a year.

The main factor that has created the continuous diffusion of medical technology in China is the gradual easing of government regulation on medical technology imports, which provided the stimulus for increased supply. As China has moved towards a market-driven economy since 1979, the practice of setting all imports to domestic prices that had been so common during the communist era began to end and imports started to roll in. In 1984, China began “foreign trade agent price formation,” which was an attempt to price imported goods, including medical devices, at world prices, in addition to any extra fees and tariffs that were required.

Despite the more open trade policies, pricing and consequently demand were still subject to the distortion brought about by the extra tariff fees. However, the Chinese government changed its policies towards medical device imports at the beginning of the 21st century. Tariffs on medical apparatuses fell from 9.9 percent in 2000 to 4.7 percent after China’s admittance to the World Trade Organization in 2001. The tariff reduction can be associated with the boom in the medical device market, which saw a revenue increase of almost 60 percent in two years between 2003-2005 as compared to the 70 percent increase in six years between 1997-2003. Effectively, the doors to China’s medical device market were flung wide open. The move towards liberalized trade in medical devices reflected a desire to introduce new technology and medical methods to the country, a push for modernization which naturally accompanied the country’s economic growth.

Recently, however, the Chinese government looks as if it wants to make medical device production a more domestic endeavor and has thus increased its effort to create an endogenous industry. China currently imports much of its advanced medical equipment, but also has the second largest domestic medical device market in Asia behind Japan’s. Hsiao estimates that 50 percent or more of the medical equipment in China originates from foreign suppliers, with the United States as the largest importer, but that may change given new regulations.