A theoretical investigation of the reformed public health insurance in urban China

With its transition to a market-oriented economy, China has gone through significant changes in health care delivery and financing systems in the last three decades. Since 1998, a new public health insurance program for urban employees, called Basic Medical Insurance Program (BMI), has been established. One theme of this reform was to control medical service over-consumption with new cost containment methods. This paper attempts to evaluate the effects of the reformed public health insurance on health care utilization, with in-depth theoretical investigation. We formulate a health care demand model based on the structure of health care delivery and health insurance systems in China. It is assumed in the model that physicians have pure monopoly power in determining patients¡¯ health care utilization. The major inference is that the insurance co-payment mechanism cannot reduce medical service over-utilization effectively without any efforts to control physicians¡¯ behavior. Meanwhile, we use the calibrated simulation to demonstrate our hypothesis in the theoretical model. The main implication is that physicians¡¯ incentive to over utilize medical services for their own benefits is significant and severe in China.