8007APRIA Full Paper Zhu Minglai

WELFARE EFFECTS OF PUBLIC HEALTH INSURANCE REFORM: THE CASE OF
URBAN CHINA
Jihong Ding
Associate Professor
Institute of Economics
Nankai University
94 Weijin Road, Tianjin 300071
P. R. China
Email: jding@nankai.edu.cn
Minglai Zhu
Professor
Department of Risk Management and Insurance
Nankai University
94 Weijin Road, Tianjin 300071
P. R. China
Phone: 86-22-23506575
E-mail: zhuml@nankai.edu.cn
1
WELFARE EFFECTS OF PUBLIC HEALTH INSURANCE REFORM: THE CASE OF
URBAN CHINA
Jihong Ding Minglai Zhu
ABSTRACT
This paper evaluates Chinese public health insurance reform enforced since 1998 in terms of
its welfare effects. Over the past decades, while universal health insurance systems were
developed with clear equity considerations in most wealthy countries, moral hazard has a great
impact on what is seen as the problem of radical growth of health expenditures. On the other
hand, the study of health care and health insurance systems in emerging markets is very limited
in the literature. During the transition from a centrally planned to a market-oriented economy,
Chinas health care and health insurance system is being reformed. Since the launching of Basic
Medical Insurance Program (BMI) in 1998, the public health insurance program, which was
used to be the main funding sources of medical services (especially for residents with high
socioeconomic status), has been restructured to be more universal, and a new co-payment
mechanism has be designed to control the over-consumption of medical service as well. In this
study, we evaluate China health insurance reform since 1998 using the China Health and
Nutrition Surveys (CHNS) data with relevant econometric models. The results of empirical
studies show that the public health insurance status has significant impact on medical service
utilization and expenditure. The reform reduces the positive effect of public health insurance on
medical service utilization, meaning the utilization gap is narrowed after the reform. However,
the empirical studies find that the medical expenditure growth of the sample individuals in urban
China has not been controlled after the BMI program even if a new co-payment is enforced. Two
main reasons for this failure might be the rising cost of medical service and physicians severe
moral hazard, while both of them come from no managed care mechanism for medical service
providers in China.
KEY WORDS: Health Insurance Reform, Medical Service Expenditure, Medical Service
Utilization
1. INTRODUCTION
A desirable system for providing and financing health care would achieve three goals: (1)
preventing the deprivation of care because of a patients inability to pay; (2) avoiding wasteful
spending; and (3) allowing care to reflect the different tastes of individual patients. Although it is
not possible to realize fully all three of these goals, they can condition and inform the design of a
good system for financing health care (Feldstein, 2006). To realize the first goal, many wealthy
countries developed the universal, national health insurance systems with clear equity
considerations. Since 1980, more and more countries can no longer afford the commitment to
complete such equity in health care consumption (Cutler, 2002). Many economists and
policymakers advocate a new health insurance system with higher co-payment mechanism to
promote efficiency of public health insurance so as to reach the second goal. They also suggest a
new mixed insurance system (or called parallel system) in which private health insurance will
2
play more important role (Chernichovsky, 2000; Hurley et al, 2002), which is helpful for
realizing the third goal. Most of the previous studies are focusing on the developed countries,
such as the United States, the United Kingdom, Australia and Canada, etc. The analysis of health
care and health insurance systems in emerging markets is very limited.
Since the founding of the Peoples Republic of China in 1949, China has attempted to
establish a universal national health insurance system. By the late 1970s, health services in
urban China had been mainly provided by public hospitals and clinics, and the price and quantity
of medical service were strictly controlled by the government. Meanwhile, urban health care had
been financed primarily through two major public insurance programs: the Government
Insurance Program (GIP) and Labor Insurance Program (LIP). Before the economic reform,
China was successful in balancing the first and the second goals, but sacrificed the third goal of a
desirable system.
Following the trend of economic reform started in 1980, Chinese hospital sector introduced
the responsibility system giving bonus payments to health personnel as an incentive to greater
utilization of the medical resources. The market-orientation and commercialization of health care
providers immediately resulted in supply-induced over-consumption of health care services. In
addition, with the economic reform in China, the original GIP and LIP resulted in an increasing
number of urban residents not having adequate health insurance, a rapid rise in health care
expenditure and inefficient health resource allocation. China was far from realizing the first and
second goals. Aiming at dealing with these issues, China has implemented a series of reforms in
the urban health insurance system. In 1998, the Chinese government announced a decision to
establish a new social insurance program for urban employees, called Basic Medical Insurance
Program (BMI), which will gradually replace the existing LIP and GIP. The focus of the reform
since 1998 is increasing the level of socialization or risk pooling along with the cost
containment by demand management.
This study tries to evaluate China public health insurance reform since 1998 in terms of its
welfare effects. We use pooled time series and cross sectional China Health and Nutrition Survey
data (CHNS 1997, 2004) to test our predictions. Medical service utilization and personal medical
service expenditure are employed as dependent variables respectively. We regress them on
public health insurance status and other control variables consisting of health related variables,
socioeconomic variables, demographic variables, and medical service cost variables. The
impacts of these independent variables on medical service utilization and medical service
expenditure, and how the health insurance reform since 1998 affects these impacts, are tested.
We also examine whether or not the reform reaches its original goal in risk pooling and cost
containment, by examining the change of the effect of public health insurance status on medical
service utilization and expenditure over the reform period.
The empirical results provide evidence that the reform of China public health insurance
system is successful in the sense of improvement in medical service utilization. However,
wasteful medical spending caused by public health insurance was not affected by the reform in
1998, although the reform designs a new co-payment mechanism. Theoretically, the over-
consumption of medical services should be controlled not only by demand management such as
co-payment, but also by supply management like managed care. Since China has not
implemented managed care in health care system yet, so the medical expenditure could not be
controlled efficiently even after the enforcement of public health insurance reform.
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This paper is divided into four major sections. In Section 2, we present literature review.
Section 3 contains our empirical study. Summary and discussion are shown in Section 4.
2. LITERATURE REVIEW
2.1. Theoretical Background
2.1.1. Insurance and moral hazard
Ehrlich and Becker (1972) developed a theory of demand for insurance that emphasized the
interaction between market insurance, self-insurance, and self-protection. The demand for
market insurance is derived in conjunction with that for self-insurance and self-protection.
Meanwhile, the effect of market insurance on the demand for self-protection is called moral
hazard (Ehrlich and Becker, 1972). When economists explore dimensions of consumer
incentives in health care, they find that insurance is very important because it modifies the
money price of medical care, the income of the insured, and the opportunity cost of time in the
event of illness. The effect of insurance on health behavior and health care consumption is called
moral hazard (Zweifel and Manning, 2000). Health insurance involves a fundamental tradeoff
between risk spreading and moral hazard (Arrow, 1963; Pauly, 1968; Zeckhauser, 1970,
Manning and Marquis, 1996, 2001).
In health care, ex ante moral hazard refers to the situation prior to the advent of illness, while
ex post moral hazard comes into play once the health loss has already occurred. There is very
limited empirical evidence about ex ante moral hazard in health care (a reduction of preventive
effort in response to health insurance coverage). The case for ex post moral hazard in health care
(an increase in the demand for health care of a given technology) is so strong that it cannot be
ignored. The moral hazard problem could be controlled by demand management such as co-
payment and supply management like managed care (Culter and Zeckhauser, 2000; Ma and
Riordan, 2002). Zweifel and Breyer (1997) emphasized the optimal design of health insurance
contracts to control or/and reduce moral hazard. Osterkamp (2003) examines whether there is a
way in which to reduce moral hazard in public health insurance systems by introducing co-
payments while avoiding undesirable distribution effects and shows that rightly adjusted and
double-differentiated co-payment rates can at least partially resolve the dilemma between
allocation and distribution. Petretto (1999) models a national health system in which compulsory
social insurance, covering a package of essentials, is integrated by a private policy topping up the
remaining services, with co-payments of patients.
2.1.2. Evaluation of public health insurance
Akerlof (1970) first expounded the impact of asymmetric information, namely adverse
selection, on the working of markets, and conjectured that compulsory insurance may be welfare
improving. Zweifel and Breyer (1997) states that given adverse selection, that is, if risks of
illness are heterogeneous and not observable to the insurer, then good risks cannot obtain
comprehensive insurance cover at favorable conditions in a market equilibrium. In this case, the
introduction of compulsory insurance may result in a Pareto improvement (Zweifel and Breyer,
1997). On the other hand, Hansen and Keiding (2002) shows that, under conditions of adverse
selection, a compulsory scheme (where the level of reimbursement of loss is to be determined by
majority decision) may in certain environments yield a solution which is inferior to that obtained
in a competitive insurance market (where some risks remain uninsured).
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Felstein (1977) proposes an idea that publicly provided insurance can be used to combat moral
hazard. Besley (1989) justifies this intuitive argument by showing that publicly provided disaster
insurance encourages insured individuals to reduce the amount of private insurance that they buy
and hence diminishes the moral hazard problem, and therefore the introduction of public
insurance for high severity illness into a private insurance for low severity illness yields a
welfare improvement. Selden (1993) pointed out that Besley (1989)s conclusion was incorrect
in the sense that it was established within the framework of a model which, under the
assumptions Besley (1989) used, would have no equilibrium. Blomqvist and Johansson (1997)
argue that both Besley (1989) and Selden (1993) are wrong in the sense that under a reasonable
interpretation of the environments which they consider (i.e., neither the government nor private
insurers can directly observe the illness severity parameter that serves as the state variable in the
model), any equilibrium in which private insurance co-exists with a government plan is strictly
less efficient than a purely private system. Selden (1997) showed that defining the appropriate
role for government has relatively little to do with whether there is more or less moral hazard in a
mixed public/private system than in a purely private one. Rather, the more central issues for
health economists to address involve how (and whether) the government can harness markets to
obtain the benefits of competition while avoiding the problems of inequality and adverse
selection.
2.2. Empirical Studies
2.2.1. The effects of health insurance on health care access and utilization
Health insurance is often cited as a policy instrument with the capacity to improve equity of
health care access and health outcomes. The expansion of social health insurance programs is
also viewed as a means to pool risk, increase health care utilization and improve health status of
the population. Numerous studies have examined the effect of insurance on health care
utilization in the United States. Rosett and Huang (1973) and Manning et al. (1987) provide early
empirical research on the impact of health insurance on the demand for medical care for U.S.
households. Kreider and Nicholson (1997), Lichenberg (2002), and Meer and Rosen (2004) are
the recent studies on this topic. Kreider and Nicholson (1997) indicated that the homeless people
who lack health insurance face strong financial barriers to health services. Their results suggest
that insurance coverage does have a strong positive effect on nearly all forms of utilization.
Lichenberg (2002) found that utilization of ambulatory care and inpatient care increases
suddenly and significantly at age 65, presumably due to Medicare eligibility. Meer and Rosen
(2004) estimated how a variety of medical service utilization measures depend on private
insurance status and other covariates. In a systemic, structured, and comprehensive literature
review, Buchmueller et al. (2005) reports finding consistent significant effects of insurance on
medical care utilization for outpatient and inpatient care for children and adults.
There are also some studies that investigate the impact of health insurance status on medical
service utilization in other developed countries. Holly et al. (1998), Marcos and Vera-Hernandez
(1999), and Buchmueller et al. (2004) represent the case study in Switzerland, Spain and France,
respectively. They all provide similar results as those studies in the United States mentioned
above. While fewer studies of the effect of insurance on health care utilization in developing
countries, insurance is often directly linked to the institution providing health care. Therefore,
access and equity in access are often additional components of the role of insurance on health
care use, which is less considered in the studies in developed countries.
5
Five selected studies with strong causal designs examining the impact of social health
insurance status on health care use in developing countries and districts are summarized below.
Yip and Berman (2001) empirically assessed the extent to which the School Health Insurance
Programme (SHIP) in Egypt achieves its state goals, i.e., improving access and equity in access
to health care for children and ensuring program sustainability at the same time. Their findings
show that the SHIP significantly improved access by increasing visit rates and reducing financial
burden of use (out-of-pocket expenditures). Hidayat et al. (2004) examined the effects of
mandatory health insurance on access and equity in access to public and private outpatient care
in Indonesia. This study found that a mandatory insurance scheme for civil servants (Askes) had
a strongly positive impact on access to public outpatient care, while a mandatory insurance
scheme for private employees (Jamsostek) had a positive impact on access to both public and
private outpatient care. Wichaikhum (2004) tried to assess the new national health insurance
program (called 30-baht health scheme) introduced in Thailand. This study found that the 30-
baht health scheme has expanded health insurance coverage to the previously uninsured and this
expansion has resulted in improved access for the uninsured as demonstrated by the increase of
hospital utilization after the implementation of the 30-baht health scheme. Ruiz, Amaya and
Venegas (2007) evaluated the Colombian health insurance reform that addressed improvement of
access to health services for poor populations. A new, segmented progressive social health
insurance approach was designed in Colombia, with a strategy to assure universal coverage
expanding the population covered through payroll linked insurance, and implementing a
subsidized insurance program for the poorest people. The results in this study showed that
subsidized health insurance improve health service utilization and reduces the financial burden
for the poorest, as compared to those non-insured. Chen et al. (2007) evaluated the impact of
China Taiwans National Health Insurance program (NHI) established in 1995, on improving
elderly access to care and health status. They show that Taiwans NHI has significantly increased
utilization of outpatient and inpatient care among the elderly, while didnt reduce mortality or
lead to better self-perceived general health status for Taiwanese elderly.
2.2.2. Evaluation of public health insurance reform in urban China
The purpose of our paper is to evaluate Chinas urban public health insurance reform since
1998. Most previous research on China public health insurance (Hu et al., 1999; Liu et al., 2002;
Wu et al., 2005; Yi et al., 2005; Liu and Zhao, 2006) focus on the equity issue, using survey data
of one or two representative cities in China to evaluate the distribution of health insurance and
health financing.
Hu et al. (1999) analyzed the impact of enterprise reform since 1980 on workers health care
benefits and their financial burden due to medical expenses, based on a 1992 survey conducted in
22 cities. They found that there were wide variations of coverage for health care benefits among
urban Chinese workers. Higher levels of education, income measured by wage categories,
enterprise wealth measured by fringe benefits (public housing, high bonuses) and state enterprise
employment all significantly increased the likelihood of full and partial health insurance
coverage. Liu et al. (2002) evaluated changes in access to health care in response to the pilot
experiment of urban health insurance reform in China, using data from the annual surveys
conducted in Zhenjiang City from 1994 through 1996. They found that after the reform the new
insurance plan led to a significant increase in outpatient care utilization by the lower
socioeconomic groups, making a great contribution to achieving horizontal equity in access to
basic cares. Wu et al. (2005) evaluated the financial impacts of Beijings health-insurance reform
6
on public and private enterprises by surveying over two thousands families in Beijing, and
showed that this new plan would place a sharp cost-increase burden on the private sector,
especially on international firms. Yi et al. (2005) estimated changes in the distribution of health
care finance before and after the reform in urban health insurance, using data from annual
surveys of employees covered by the health insurance scheme in Chinas Zhenjiang City during
1993-1999. They found that the contributions to the social-risk pooling account (SPA) of the
new program played an important role in equalizing health care financial burden, while that the
introduction of personal medical savings accounts (MSAs) of the new program has resulted in
more resources being available for high-income insured employees and an increased burden on
low-income ones. Using the same survey data of Zhenjiang City, Liu and Zhao (2006) examines
changes in the pre- and post-reform distributions of out-of-pocket (OOP) expenditures across
four representative groups by chronic disease, income, education, and job status. The major
findings suggested increased OOP expenditures for all groups after the reform. However, the
redistribution in OOP appears to be in favor of the disadvantaged groups, implying a more
equitable change led be the reform. Zhang and Kanbur (2005) studied the evolution of spatial
inequalities in education and healthcare in China over the long run since the economic reforms
began, using data from different sources. They found that social inequalities have increased
substantially since the reforms, across provinces and within provinces, between rural and urban
areas and within rural and urban areas.
Unlike the prior studies, we try to evaluate the welfare effect of China urban public health
insurance reform since 1998, based on the China Health and Nutrition Survey (CHNS) that
contains nationwide sample. We provide some new statistical and qualitative analysis for health
insurance status and medical service utilization and expenditure.
3. EMPIRICAL TEST
3.1. Data Source
We select the China Health and Nutrition Survey (CHNS)
1
data sets in our empirical studies.
The CHNS is a longitudinal survey that covers 9 out of Chinas 33 province-level divisions. Four
counties, stratified by income, were randomly selected in each of these 9 provinces. Within the
36 counties and urban areas, 190 primary sampling units (villages and urban communities) were
selected randomly. Currently there are about 4,400 households in the overall survey, covering
about 16,000 individuals. Follow-up levels are high, but families that migrate from one
community to a new one are not followed.
The darker shaded regions in Figure 1 are the provinces in which the survey was conducted.
They are: Guangxi, Guizhou, Heilongjiang, Henan, Hubei, Hunan, Jiangsu, Liaoning and
Shandong.
Figure 1 CHNS Sample Distribution
1
The CHNS data are jointly released by Carolina Population Center at the University of North Carolina at Chapel
Hill, the national Institute of Nutrition and Food Safety, and the Chinese Center for Disease Control and Prevention.
Full description of CHNS can be found on website http://www.cpc.unc.edu/projects/china.
7
The first wave of the CHNS, including household, community, and health/family planning
facility data, was collected in 1989. Five additional panels were collected in 1991, 1993, 1997,
2000, and 2004. Since 1993, all new households formed from sample households have been
added. Since 1997, new households in original communities have been also added to replace
households no longer participating in the study. Also since 1997, new communities in original
provinces have been added to replace sites no longer participating. A new province was also
added in 1997 when one province was unable to participate. The dropped province returned to
the study in 2000.
2
2
CHNS1989 included 3,795 households. 3,616 households, 3,441 households, 3,875 households, 4,403 households,
and 4,386 households participated in CHNS1991, CHNS1993, CHNS1997, CHNS2000 and CHNS2004,
respectively. All individuals in each household were surveyed in 1991, 1993, 1997 and 2000 for all data; however in
1989, health and nutritional data were only collected from preschoolers and adults aged 20-45. CHNS1989 surveyed
15,917 individuals. CHNS1991 only surveyed individuals belonging to the original sample households which
resulted in a total of 14,778 individuals. In CHNS1993, all new households formed from sample households who
resided in sample areas were added to this sample, resulting in a total of 13,893 individuals. In CHNS1997, all
newly-formed households who resided in sample areas and additional households to replace those no longer
participating were added to the sample. New communities were also added to replace communities no longer
participating, and Heilongjiang province replaced Liaoning province. A total of 14,426 individuals participated in
1997. In CHNS2000, newly-formed households, replacement households, and replacement communities were again
added, and Liaoning province returned to the study. A total of 15,648 individuals participated in 2000. In 2004, the
sample increases a total of 16,219 individuals.
8
The CHNS project was designed to examine the effects of the health, nutrition, and family
planning policies and programs implemented by national and local governments, and to see how
the social and economic transformation of Chinese society is affecting the health and nutritional
status of its population. The impact on nutrition and health behaviors and outcomes is gauged by
changes in community organizations and programs as well as by changes in sets of household
and individual economic, demographic, and social factors.
The health services section of CHNS contains detailed data on insurance coverage, medical
providers, and health facilities that the household might use under selected circumstances.
Questions about accessibility, time and travel costs, and perceived quality of care are asked.
Information on illnesses and on all uses of the health system during the previous month is
collected for children below age 7 and for adults between ages 20 and 45 in 1989, and from all
household members in later years. Questions on immunizations, use of preventive health
services, and use of family planning services are also asked.
A large number of important health, demographic, socioeconomic, and nutrition policy studies
have been undertaken with these data. The basic motivation for all of these studies is the
necessity of integrating biomedical and socioeconomic policy analyses. However, most research
objectives are centering on the nutrition essays, such as of modeling the nutrition transition,
poverty and nutrition, physical function of the older population, fertility and child care.
3
The
previous studies on health services utilization and health care financing with CHNS data are
limited and all focus on the equity access to health services and health insurance. We find four
published papers exploring such issues with CHNS data and summarize the main results as
following. Henderson et al. (1994) is the first paper that investigates the equity and utilization of
health services with CHNS data. The results suggest that China has achieved a very wide
distribution of clinics and other services at the local level, and that they are widely used by those
who identify need for them. Akin, et al. (2004) examined changes in the distribution of health
insurance across socioeconomic groups in China over the 1989-1997 period, based on 1989,
1991, 1993, and 1997 waves of the China Health and Nutrition Survey (CHNS). They found that
certain previously noted differences in coverage rates across socioeconomic groups narrowed
significantly, while aggregate insurance coverage rates in the sample changed little over this
period. Zhao and Hou (2005) investigated the health demand in urban China applying Grossman
model, using 2000 wave of China Health and Nutrition Survey (CHNS). Akin, et al. (2005)
examined the distribution of the changes in several indicators of access to health care (such as
distance to closest health facility, service charges, time spent waiting to be seen by a health
professional, whether treatment is provided by a doctor trained in Western medicine, and
whether basic medicine is available in the facility) across communities during the period 1989 to
1997, utilizing the 1989 and 1997 waves of the CHNS and found evidence of relatively uneven
changes to these indicators.
We choose CHNS as the data source of our study for two reasons: first, most information
needed in our empirical model could be provided by this dataset; second, as much as we know, it
is the only publicly released dataset with information at household level, and could be freely
downloaded for academic research. This study draws data from two waves of the CHNS: 1997
and 2004. These two waves cover a period of dramatic change of health insurance system in
3
The list of total papers using CHNS data could be found at http://www.cpc.unc.edu/projects/china/totalchnspapers.
9
China. We focus on how the public health insurance reform since 1998 affects the households
medical service utilization and medical service expenditure.
Although the CHNS survey is conducted at household unit, most information about medical
service consumption and health insurance status depend on each person in the household. So, the
sample in our model is set at individual level, rather than household level. Furthermore, since the
public health insurance program only provides coverage for urban people, the sample in rural
area is not considered in our analysis. After deleting missing data, final observations in our
model accounts for more than three quarters of the initial sample.
3.2. Econometric Model
In this section, we outline our estimation methodology. Medical service utilization and
personal medical expenditure are employed as dependent variables in our econometric model,
respectively. We regress them on public health insurance status and other control variables.
Consider two equations as following:

+ + + + + +
+ + + + +
+ + + + + +
DRUG AREA COST TIME COST
TIME HEALTH HEALTH HEALTH OCC
MARRY AGE GENDER INS INCOME EDU MEDUTI
16 15 14 13 12
11 10 9 8 7
6 5 4 3 2 1 0
2 2 1
1 3 2 1
(1)

+ + + + + +
+ + + + +
+ + + + + +
DRUG AREA COST TIME COST
TIME HEALTH HEALTH HEALTH OCC
MARRY AGE GENDER INS INCOME EDU MEDEXP
16 15 14 13 12
11 10 9 8 7
6 5 4 3 2 1 0
2 2 1
1 3 2 1
(2)
where
MEDUTI = using health facility when feel sick: dichotomous dependent variable, if yes, equal to
1, otherwise, 0;
MEDEXP = personal medical expenditures occurred during the past 4 weeks;
EDU = education level in index of the respondent;
INCOME = annual average income of the household, in natural logarithm value;
INS = dummy variable of the health insurance status of the respondent: if covered by public
health insurance program, equal to 1, otherwise, 0;
GENDER = dummy variable of the gender of the respondent: if male, equal to 1, otherwise, 2;
AGE = age of the respondent;
MARRY = dummy variable for marital status of the respondent: if married and living with
partner, 1, otherwise, 0;
OCC = dummy variable of the occupation category for the respondent: if works as government
officer or staff, 0, otherwise, 1;
HEALTH
t
= dummy variables of self-assessed health reported by the respondent (t = 1, 2, 3):
1 = excellent;
2 = good;
3 = fair;
4 = poor;
TIME1 = traveling time to the healthcare facility, in minutes;
TIME2 = waiting time at the healthcare facility, in minutes;
COST1 = transportation cost of traveling to the facility, in natural logarithm value;
10
COST2 = cost of treatment of cold or flu in the facility, in natural logarithm value;
AREA = dummy variable for the location of the household: if the province is located in Eastern
China, equal to 1, otherwise, 0;
DRUG = dummy variable for western medicine availability at the healthcare facility: if available,
equal to 1, otherwise, 0.
The descriptive statistics for the dependable variables and the explanatory variables are
presented in Table 1.
Min. Max. Mean Std.Dev. Min. Max. Mean Std.Dev.
MEDUTI Health facility utilization; Dichotomous dependent variable 0 1 0.828 0.377 0 1 0.764 0.185
MEDEXP Medical expenditures in thousand dollar; Dependent variable 0 80.2 0.206 2.335 0 9.999 0.063 0.565
Ins Public health insurance status; Dummy variable 0 1 0.417 0.493 0 1 0.432 0.705
Area Location of the household; Dummy variable 0 1 0.462 0.499 0 1 0.364 0.481
Income Annual household income in natural logarithm value 0 11.118 7.177 3.051 0 10.465 7.04 2.57
Edu Index of education level 0 36 20.538 9.464 0 35 19.355 9.315
Age Age of the respondent 12 97 48.321 16.889 5 110 43.368 16.834
Gender Gender of the respondent; Dummy variable 1 2 1.57 0.495 1 2 1.524 0.499
Marry Marital status; Dummy variable 0 1 0.865 0.342 0 1 0.666 0.497
Occ Occupation Index; Dummy variable 0 1 0.899 0.3 0 1 0.839 0.367
Health1 Self-assessed health reported by the respondent; Dummy 0 1 0.119 0.324 0 1 0.112 0.315
Drug Western medicine available at the facility; Dummy variable 0 1 0.98 0.139 0 1 0.939 0.238
Time1 Traveling time to the facility in minutes 0 302 15.165 19.224 0 601 17.979 30.396
Cost1 Transportation cost to the facility in natural logarithm value -2.303 4.604 0.244 0.708 -1.609 3.555 0.065 0.436
Time2 Waiting time at the facility in minutes 0 360 14.845 26.977 0 480 23.823 36.243
Cost2 Cost of treatment of cold or flu in the facility in natural logarithm -1.609 6.907 3.109 1.719 -1.609 5.991 2.566 1.397
Observation N 2759 2852
Table 1 Summary Statistics of Variables
1997
Variable
2004
Label
3.2.1. Dependent variables and the health insurance status
Since we try to evaluate the welfare effects of the public health insurance reform in China, the
variables MEDUTI and MEDEXP should be employed to test the effect of public health
insurance status INS changes on the medical service utilization and medical expenditures.
3.2.1.1. Medical service utilization
In previous studies, various variables were employed as the proxies for medical service
utilization, and also used to evaluate the access of health care. Some of these proxies are not
available in the CHNS data sets. We use the MEDUTI as one dependent variable in the
regression models. MEDUTI is defined as the probability of physician visit for the respondents
when they fall sick, which is consistent with the proxy choice in many previous studies (see
Table 2).
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Table 2 Empirical Results of Some Selected Literature on Health Care Utilization

NS

(+)
Categories
NS

Note: 1. NMCES refers to the National Medical Care and Expenditures Survey; ENSA refers to the Encuesta Nacional de Salud (Natiional Survey of Health);
SHS refers to the Swiss Health Survey released by Swiss Federal Statistical Office; The four Colombian cities include Bogota, metropolis; Manizales, middle-sized city;
CHS refers to the Catalonia Health Survey; Campoalegre, rural town; Palermo, rural village.
HHCUES refers to the Household Health Care Utilization and Expenditure Survey; 2. The explanatory variables in each paper may not be limited by the listed above.
IFLS2 refers to the second round of the Indonesian Family Life Survey; N/A means that the estimator is not available in the regression model;
ESPS refers to the Enquete sur la sante et la protection sociale , an national household survey NS means that the variable is not statistically significant in the model;
conducted by CREDES - Centre de Recherche d'Etude et de Documentation en Economie de la Sant (+) and (-) are the signs estimated for relevant variables;
-every other year; Categories/Dummy refers to the characteristics of the variable.
Categories,
NS
Categories,
Self-
assessed
dummy
NS
N/A N/A
(+) for
Urban Area
N/A
Categories,
(+) for higher
income
Categories,
Self-
assessed
dummy
Buchmuelle
r et al.
(2004)
ESPS 1997 in
France
Adults ages
25 and above
Probit Model
Probability of
physician visits
Having
supplemental
insurance (+)
(-)
Categories
for parental,
(+) partial
Categories,
(+) for
higher
education
Male (-)
N/A N/A
Yip and
Berman
(2001)
HHCUES
1994-95 in
Egypt
Children ages
between 6 and
18
Logit Model
Probability of
physician visits
Having social
health insurance
(+)
Categories, (+)
for age 12-15
NS
N/A Categories,NS
Categories,
Self-
assessed
dummy
NS
Categories,
Self-
assessed
dummy
Holly et al.
(1998)
SHS 1992-93
in Switzerland
People ages
15 and above
Probit Model
and ML for
Simultaneous
Equation Model
Probability of
inpatient use
(+) Male (+)
Index, (-)
for primary
workers
Probability of
having medical
expenses
Categories, (-)
for age young
olders less 75
Male (-)
Categories,
(+) for
higher
education
Cartwright
et al. (1992)
NMCES 1977
in the U.S.
Adults elderly
65 and above
Logit Model
Dependent
Variable
Insurance
Measure
Estimation Results for Explanatory Variables
2
Household
Income
Health
Status
Labor Market
Status
Married
Status
Studies Data/Sample
1
Population
Estimation
Techniques
Regional
Index
Having
Medigap
insurance (+)
N/A N/A N/A
Age Gender Education Occupation
N/A
Having
supplemental
insurance (+)
Index, (+)
for higher
education
N/A
(-) for the
alone
index,
symptom
items, NS
index, (+)
for Urban
Area
Vera-
Hernandez
(1999)
CHS 1994 in
Spain
Adults ages
between 18
and 59
GMM Model
Number of
specialist
physician visits
Having both
public and
private
insurance (+)
(-) Male (-)
Categories,
NS
NS N/A
Ruiz et al.
(2007)
Cohorts in four
Colombian
cities 2000-01
All ages Logit Model
All health
service events
Having any
kind of
insurance (+)
Categories, (+)
for age olders
Male (-) N/A N/A
Categories,
(+) for partial
higher income
N/A
N/A
(-) for the
alone
NS for
Urban Area
Number of
months
working (+)
(-) for the
alone
Significant
between
areas
Categories,
NS
N/A
Wealth
Indicator (+)
N/A
All health care
events
Having any
kind of
insurance (+)
(+) Male (-)
Gonzalez
(2005)
ENSA 2000 in
Mexico
All ages
Linear
Probability
Model with
2SLS
3.2.1.2. Medical expenditure
In addition, we define MEDEXP, as the proxy for the medical services expenditures in the
second regression model. Some literatures, such as Ruiz et al. (2007), Wark (2004), and Atherly
(2002), provide some evidences of the impact of health insurance status on the medical
expenditures. For example, Wark (2004) studied the impact of health insurance on the medical
expenditures in the U.S. She found that all types of insurance coverage increased total
expenditures, making a case for the presence of moral hazard. Public coverage (Medicare and
Medicaid) had the highest levels of total expenditures as compared with the base group of the
uninsured. Individuals with private insurance coverage had the next highest. Those with
managed care coverage had the lowest relative increase in total expenditures, again showing the
successful implementation of cost containment strategies.
3.2.1.3. Health insurance status
All independent variables used in the estimation could be grouped into four major vectors:
health related variables, socio-economic variables, demographic variables, and health insurance
status. The health insurance status (INS) is the key explanatory variable employed in our
empirical analysis. It should be noted that, many previous studies get insights about the
endogenity of the insurance choice decision and the role of the instruments for the econometric
12
specification. Since Chinese public health insurance program we consider in this model is
mandatory, the proxy variable can be supposed as exogenous. We predict that, compared with
the base group of uninsured, health insurance status INS positively affects medical service
utilization MEDUTI and medical service expenditures MEDEXP.
Chinese public health insurance reform since 1998 changed many urban employees health
insurance statuses, and hence changed their medical service utilization and medical service
expenditure in that (1) it introduces the basic medical insurance to individuals who have not
public insurance before the reform and (2) it introduces the co-payment mechanism to
individuals having public insurance before the reform. So, we predict that the positive effect of
health insurance status INS on medical service utilization MEDUTI is decreased with Chinese
public health insurance reform in 1998. In terms of the medical service expenditures MEDEXP,
the positive effect of health insurance status INS may be decreased because of the introduction of
co-payment mechanism of the public insurance, and may as well be increased because of the
rising cost of medical service over the years and physicians moral hazard behavior in China. So,
we predict that the change of the positive effect of INS on MEDEXP is ambiguous.
3.2.2. Other control variables
Control variables are widely employed in empirical studies and such variables are available in
the CHNS data sets. Summaries of the relevant results from prior studies are presented in Table
2. We provide a brief description of the main control variables in our model and also predict their
relevant relationships with the dependent variables as follows.
3.2.2.1. Health status
Individuals medical service consumption usually increases with his/her sickness. Health self-
assessed indices are often employed as the proxies for the risk of individuals falling sick in the
survey. It is reasonable that higher risk people are assumed to prefer more health care than the
lower risk people. Such assumption is tested in our model.
3.2.2.2. Income
We predict that individuals medical service consumption increases with his/her income. Most
previous empirical studies also have shown that medical service utilization and/or expenditures
are positively correlated with household income. Intuitively, as income increases, medical
service utilization and consumption become more affordable. To account for its skewed and
asymmetric distribution, we utilize a logarithmic transformation for income.
3.2.2.3. Education level
Normally, a higher level of education may lead to more awareness of the necessity of health
care and higher abilities to manage the potential risks. On the one hand, education reduces the
optimal, age-specific density of morbidity and mortality (Ehrlich 2000, Ehrlich and Yin 2005),
and hence raises the demand for health capital. On the other hand, more educated people are
also more efficient in using health input to generate good health or reduce the incidence of
morbidity and mortality. Therefore, the net effect of education on the demand for the medical
care inputs (thus health care expenditures) may be "neutrality".
3.2.2.4. Occupation
Occupation is a socioeconomic variable that should be included in the medical service
utilization and expenditure functions, which has been tested by previous studies with
13
unsatisfactory results (Table 2). We test whether individuals working in government sector have
higher medical service utilization/expenditure or not. Its effect on medical service
utilization/expenditure could be ambiguous.
3.2.2.5. Gender
Most empirical studies (Cartwright et al., 1992; Marcos and Vera-Hernandez, 1999;
Buchmueller et al., 2004; Ruiz et al., 2007) showed that the male utilizes less medical services
than the female. It might be due to the preference difference in health care between the female
and male. Such conclusion needs to be retested in our study.
3.2.2.6. Age
Most empirical studies have shown that age has a significant positive impact on medical
service utilization. Some research also measures and finds the difference among age groups in
the medical service consumption. Individuals age is related to his/her mortality risk (Ehrlich
2000; Ehrlich and Yin 2005). As a person ages, his or her mortality risk increases and demand
for health care to keep living should increase. Grossman (2000) showed the age of the individual
can be referred as the health depreciation. Ehrlich and Chuma (1990) show that the value
individuals ascribe to their health may be increasing over a good portion of their life cycle. So,
people prefer to consume more medical care as aging. Therefore, we expect that the age will
have a positive effect on the medical service utilization and expenditures.
3.2.2.7. Marital status
Marital status is another demographic variable. Its effect on medical service utilization and
expenditure could be ambiguous.
3.2.2.8. Transaction cost
Only a few previous studies (Gonzalez, 2005; and Hidayat et al., 2004) consider the
transaction cost in the model of determinants of medical service consumption. The results of
their estimations are not satisfactory, either. Four variables such as traveling time to the facility
TIME1, traveling cost to the facility COST1, waiting time at the facility TIME2, cost of treatment
of cold or flu COST2 are employed as the proxies for transaction cost in our model. COST1,
TIME1, and TIME2 are all predicted to be negatively correlated with the medical service
utilization. We utilize a logarithmic transformation for traveling cost and the cost of treatment of
cold or flu to account for their skewed and asymmetric distribution. COST2 is the cost of
treatment of cold or flu when using the health facility, which could be employed as the proxy for
average price of the facility. We test its effect on medical service utilization and expenditure. I
predict that if medical service consumption is mainly determined by physicians because of the
asymmetric information between physicians and patients, then the consumption is positively,
negatively, or neutrally affected by the price of medical service, depending on physicians moral
hazard behavior
4
.
4
Because there exists asymmetric information between physicians and patients, patients medical service
consumption is usually affected by physicians behavior. Since physicians know more about patients sickness and
effectiveness of medicine, physicians may induce patients medical service consumption, if the physicians
remuneration is proportional to the medical service, i.e., fee-for-service. Furthermore, in China, since the relaxation
of regulations on the salaries of health staff in China, hospitals have motivated physicians by linking their salaries to
the hospitals revenues coming from the patients the physicians have served, rather than to the physicians
performance. Physicians have been encouraged to over-prescribe the expensive drugs or the high-tech tests such as
14
3.2.2.9. Drug
In modern China, Chinese traditional medicine is challenged by western medicine. If a health
facility does not provide any western medicine, then it is very difficult for the facility to survive
because patients feel so inconvenient in this facility that they usually transfer to other facility.
We predict that people will more prefer to use the health facility if more western medicines are
available at this facility, i.e., DRUG positively affects medical service utilization.
3.2.3. Econometric method
In order to test the long run tendency, we need to run the regression model by each wave of
data sets independently. Specifying a different coefficient each time can adequately capture
differences in dependent variables across times when the surveys are conducted (Wooldridge,
2002). Moreover, since the CHNS series are not full panel data (i.e., some respondents in the
sample are selected to add each time the survey is conducted), no fixed effects model could be
tested.
When a dichotomous dependent variable is regressed on the explanatory variables, some
means of squeezing the estimated probabilities inside the 0-1 interval without actually creating
probability estimated of 0 or 1 is needed. So we employ the popular logistic function in the
medical service utilization equation. The LOGIT model should be created as following:
X
X
e
e
X it y prob
+

1
) ( log ) 1 ( (3)
Actually, an error term is not necessary to provide a stochastic ingredient for this model
because for each observation the value of the dependent variable is generated via a chance
mechanism embodying the probability provided by the LOGIT equation. Estimation is always
undertaken by maximum likelihood (ML) for the LOGIT case. The logistic function provides the
probability that the event will occur and one minus this function provides the probability that
will not occur. The likelihood is thus the product of logistic functions for those observations that
the event occurred multiplied by the product of one-minus-the logistic functions for those
observations that the event did not occur.
In the second equation of the regression model, the simple OLS model is potentially
problematical because data censoring in the dependent variable, i.e., the medical service
expenditure. We have to control for this problem in estimation methodology.
We find that more than one half of the respondents report that they have no medical
expenditure occurring during the past four weeks when the survey is conducted. This is
reasonable since the health risks that people face is random and the healthcare timing is
uncertain. Thus, in the econometric model, We am interested in features of the distribution of
dependent variable y given the vector of explanatory variables, X, such as E( y | X ) and P( y = 0
| X ). In this model, a zero realization for the dependent variable (MEDEXP, indexed as y) i.e. y
= 0, means the dependent variable is partially continuous but has positive probability mass at one
point. So, when y 0, E( y | X ) cannot be linear in X unless the range of X is fairly limited. The
OLS regression model could produce biased estimates if censoring is important. The censored
regression model, often called TOBIT model, generally applies to such cases. The standard
TOBIT model can be defined as
i i i
X y +
' *
X-ray, CT and MRI, driven by the high pay motivation.
15
'
>
0
0
0
*
* *
i
i i
i
y if
y if y
y
(4)
where ) , 0 ( ~
2
iidN
i
. The dependent variable of a standard TOBIT or censored regression
model is observed when
0
*
>
i
y
while independent variables are observed for
. , , 1 N i
The
log-likelihood function of the standard censored regression model is written as

>
1
]
1

+
} 0 { } 0 {
'
'
) (
ln )] / ( 1 ln[
i i
y i y i
i i
i
X y
X

(5)
where () is the standard normal distribution function and () is the standard normal density
function.
The maximum likelihood (ML) method is often employed into estimation for such a limited
dependent variable model.
5
We predict that the standard TOBIT model could provide a more
consistent estimation than the simple OLS model.
3.2.4. Difference-in-difference model
As stated above, this study is intended to demonstrate the impact of public health insurance
status on medical service utilization and expenditures, and how this impact changes over time in
response to the health insurance reform in 1998. To accomplish this goal, this study employs a
simple difference-in-difference model, which provides a straightforward framework for pursuing
our empirical analysis. The model is often set as the following form:
( )
i i i
X INS DIFF INS DIFF Y + + + + +
3 2 1 0
(6)
In the equation above,
i
Y
indicates medical service utilization and medical service
expenditure. DIFF is a dummy variable indicates observations in 2004, i.e., it is 1 for 2004 and
0 for 1997.
1
thus captures the difference in the post-reform period and pre-reform period.
INS is a dummy variable equal to 1 if having public health insurance.
2
thus captures time-
independent difference in the comparison groups, i.e., people having public health insurance
versus people not having it. The coefficient on the interaction term, INS DIFF , captures the
difference-in-difference estimates of the impact of Chinese public health insurance reform since
1998. Table 3 illustrates the difference-in-difference methodology and how it corresponds to the
estimated equations.
Table 3 Difference-in-Difference Methodology and Estimation of the Coefficients
The difference-in-difference methodology
Has Public Health Insurance No Public Health Insurance
1997
2 0
+
0
2004
3 2 1 0
+ + +
1 0
+
Diff_1997 (Has_PHI_1997 -
No_PHI_1997)
2
5
Greene (1997) and Wooldridge (2002) provide more details in theoretical descriptions on censored data models.
16
Diff_2004 (Has_PHI_2004 -
No_PHI_2004)
3 2
+
Diff-in-diff (Diff_2004 -
Diff_1997)
3
In addition to the three major explanatory variables, We also control for a set of variables X
reflecting individuals demographic and socioeconomic characteristics, and health status in our
study, including age, gender, income, education, health status, and etc.
3.3. Regression Results
3.3.1. Medical service utilization
With the LOGIT specification, the results of the cross-sectional regression tests are shown in
the Table 4. The dependent variable is using health facility when falling sick, MEDUTI, which is
a proxy for medical services utilization. The estimated parameters of the regression equations,
the corresponding standard error and other important values of the estimations are presented. We
treat each wave of CHNS as an independent data set and run the regression separately. Since the
Ordinary Least Square (OLS) model is inferior to LOGIT estimation method, the results of OLS
are ignored here.
The variable INS is positively related to the dependent variable MEDUTI, which means people
covered by public health insurance more prefer to utilize health facility when falling sick than
people without public health insurance coverage. This result is consistent with the prediction in
our theoretical model, i.e., having public health insurance positively affects the medical service
utilization. Meanwhile, the coefficient of INS in 2004 (being 0.271) is smaller than that in 1997
(being 0.693), which means the positive effect of public health insurance coverage on medical
service utilization is decreased. This result is also consistent with our prediction, i.e., Chinese
public health insurance reform in 1998 introduced the co-payment mechanism and hence
partially controlled the patients ex post moral hazard problem.
The effect of health status on medical service utilization is tested in this model. We specify
three relevant dummy variables (HEALTH1, HEALTH2 and HEALTH3) for health status
categories in the regression models. The worst one of categories, where the respondents assess
their health status as poor, is chosen as benchmark (control group). The three dummy variables
are all negatively correlated with MEDUTI, implying the difference between each health status
group (indexed by the three dummy variables) and the basic health status group (self-assessed as
poor) omitted in our regression equation is significant. Meanwhile, the absolute value of the
coefficient of HEALTH1 is larger than that of HEALTH2, which is larger than that of HEALTH3,
for both 1997 and 2004. It means people with higher health risk (or worse health status) more
prefer to utilize health facility. This result is consistent with our prediction.
We find that neither income level INCOME nor occupation OCC has significant effect on
medical service utilization, which is inconsistent with our prediction. The explanation is that
whether or not people utilize health facility when falling sick depends more on peoples health
insurance status than on their income level or whether or not they work in government sector.
We also find that the education EDU significantly positively affects medical service utilization in
2004, which is consistent with our prediction and supports Ehrlich (2000), Ehrlich and Yin
(2005), as well.
17
Age has significant impact on medical service utilization in 2004 and 1997, which means older
people ascribe higher value to their health, and hence more prefer to utilize health facility. It is
consistent with our prediction. However, Gender or Marital status does not have significant
effects on medical service utilization.
Transaction cost, including time and money, should have negative effects on using health
facility. However, in our model, the travel time TIME1 and the travel cost COST1 to the facility
both has little effects on the medical service utilization. Furthermore, the waiting time at the
facility TIME2 even has positive effect on MEDUTI in 2004. One reason for these results is that
medical service industry is not a competitive market with perfect information, especially in
China. The quality of medical service is heterogonous and some providers could have market
power to attract more consumers, even if higher transaction cost. COST2 is the cost of treatment
of cold or flu when using the health facility, which could be employed as the proxy for average
price of the facility. I predict that the medical service consumption is decreased with the price of
the medical service if the consumption is determined by patient, while, if medical service
consumption is determined by physician, then the consumption is positively, negatively, or
neutrally affected by the price of medical service. The empirical result is COST2 has little impact
on MEDUTI. The explanation is that there is no supply management and hence the induced
demand by physicians can not be ignored in China.
The difference between areas in China is tested in our model. The variable AREA positively
affects the medical service utilization in both 2004 and 1997, which means people living in the
eastern area of China prefers more health facility. This result is consistent with our prediction,
because China eastern area is more developed than the middle and western areas, in economy,
education, health facility, and etc.
We predict that people will more prefer to use the health facility if more western medicines are
available at this facility. However, this kind of relationship between medical service utilization
and western medicines availability is not significant in our model.
18
Table 4 Impact of Public Health Insurance on Medical Service Utilization
Coefficient Std.Error Coefficient Std.Error
INTERCEPT -2.613 0.473 *** -3.171 0.895 ***
EDU Index for Education Level (+) 0.021 0.007 *** 0.002 0.014
INCOME Annual Income (+) 0.022 0.019 0.028 0.046
INS Public Health Insurance Status (+) 0.271 0.127 ** 0.693 0.257 ***
GENDER Gender (+/-) 0.116 0.111 -0.051 0.219
AGE Age (+) 0.017 0.004 *** 0.016 0.008 *
MARRY Marital Status (+/-) -0.256 0.196 0.166 0.433
OCC Occupation Dummy (-) 0.213 0.189 0.183 0.280
HEALTH1 Self-assessed Health Dummy (-) -1.772 0.259 *** -2.885 0.641 ***
TIME1 Travel Time to Facility (-) 0.008 0.029 -0.008 0.037
COST1 Travel Cost to Facility (-) -0.121 0.076 0.011 0.229
TIME2 Waiting Time at the Facility (-) 0.004 0.001 *** 0.001 0.003
COST2 Cost of Treatment of Cold or Flu (-) 0.052 0.032 0.000 0.770
AREA Dummy for Area (+) 0.226 0.109 ** 0.612 0.220 ***
DRUG Western Medicine Available Dummy (+) -0.049 0.086 -0.279 0.269
CHI-squared 176.699 129.42
Restricted log likelihood -1265.639 -436.60
Log Likelihood Function -1177.289 -371.89
*** significant at the 0.01 level; ** significant at the 0.05 level; *significant at the 0.10 level.
Variable Label (Expected Sign in Parentheses)
CHNS 2004 (n=2759) CHNS 1997 (n=2852)
Logit Logit
3.3.2. Medical service expenditures
Table 5 reports the results of regressions of Model Two with the TOBIT specification The
dependent variable is medical service expenditure MEDEXP. The estimated parameters, the
corresponding standard error and some other values of the estimations are presented. We still
treat each wave of CHNS as an independent data set and run the regression separately.
The variable INS is positively related to the dependent variable MEDEXP, which means
people covered by the public health insurance prefer to spend more on medical service. This
result is consistent with the prediction in our theoretical model. Meanwhile, we find that the
coefficient of INS in 2004 (0.961) is higher than that in 1997 (0.552), which means the positive
effect of public health insurance status on medical service expenditure is rising. The explanation
is that although Chinese public health insurance reform since 1998 partially controls patients
moral hazard problem with demand management, China does not implement supply management
19
and therefore the rising cost of medical service and physicians moral hazard lead to patients
high medical service expenditure.
The three dummy variables (HEALTH1, HEALTH2 and HEALTH3) for health status category
all have negative impact on medical service expenditure MEDEXP for both 2004 and 1997.
Meanwhile, same as their effect on medical service utilization, the absolute values of the
coefficients of HEALTH1 is larger than that of HEALTH2 and HEALTH3. It also implies that
individuals with good health status prefer to consume less medical services.
The income level INCOME significantly affects medical service expenditure MEDEXP in
2004, which is consistent with our prediction, although it has little impact on MEDUTI. The
explanation is that people with higher income prefers to spend more on medical service, although
they do not have higher preference in utilizing health facility after falling sick compared with
lower income people. Meanwhile, the education EDU significantly positively affects medical
service expenditure in 1997, which is consistent with our prediction. Occupation OCC still has
not significant effect on medical service expenditure, same as its effect on medical service
utilization.
Age still has significant impact on medical service expenditure in 2004 and 1997, which
means older people ascribe higher value to their health, and hence consume more medical
service. It is consistent with our prediction. However, Gender or Marital status does not have
significant effect on medical service expenditure.
We predict that the travel time TIME1, the travel cost to the facility COST1, and the waiting
time at the facility TIME2 have negative effects on medical service expenditure MEDEXP.
However, in this model, TIME1 has little effect on MEDEXP. Furthermore, MEDEXP is
significantly positively affected by COST1 for 1997 and TIME2 for 2004. The explanation is still
that the quality of medical service is heterogonous and some providers could have market power
to attract more consumers, even if higher transaction cost, in China. COST2 is the cost of
treatment of cold or flu when using the health facility, employed as the proxy for average price
of the facility. We predict that the impact of medical service price on medical expenditure
depends on (1) physicians moral hazard behavior and (2) the price elasticity of the medical
service demand, i.e., the impact is negative if physicians moral hazard is limited and the medical
service is price elastic, while the impact is positive otherwise. In our model, MEDEXP is
significantly positively affected by COST2 for 1997. Two of the reasons are (1) because of some
providers market power, the medical service is price inelastic in China, and (2) physicians
moral hazard behavior can not be ignored in China and hence there exists large induced demand.
We also test AREA and DRUG. Neither of them have significant effect on medical service
expenditure, as predicted.
20
Table 5 Impact of Public Health Insurance on Medical Service Expenditure
Coefficient Std.Error Coefficient Std.Error
INTERCEPT -9.697 2.297 *** -4.101 0.822 ***
EDU Index for Education Level (+) -0.007 0.032 0.027 0.013 **
INCOME Annual Income (+) 0.226 0.098 ** 0.026 0.042
INS Public Health Insurance Status (+) 0.961 0.594 * 0.552 0.250 **
GENDER Gender (+/-) 0.697 0.529 0.107 0.204
AGE Age (+) 0.063 0.020 *** 0.027 0.007 ***
MARRY Marital Status (+/-) -0.521 0.973 -0.037 0.346
OCC Occupation Dummy (-) 0.426 0.915 0.135 0.259
TIME1 Travel Time to Facility (+/-) -0.013 0.015 -0.003 0.004
COST1 Travel Cost to Facility (+/-) -0.125 0.356 0.399 0.206 **
TIME2 Waiting Time at the Facility (+/-) 0.019 0.008 ** 0.002 0.003
COST2 Cost of Treatment of Cold or Flu (+/-) 0.118 0.153 0.178 0.078 **
AREA Dummy for Area (+) 0.615 0.516 0.055 0.212
DRUG Western Medicine Available Dummy (+) -0.409 0.455 -0.059 0.115
Sigma 7.399 0.307 *** 2.587 0.144 ***
Log Likelihood Function -1595.617 -859.149
CHNS 2004 (n=2759) CHNS 1997 (n=2852)
Tobit Tobit
3.3.3. Difference-in-difference model
Since the public health insurance reform is enforced in 1998, we also evaluate the effect of the
reform with the difference-in-difference model. We pool two waves of data (1997 and 2004)
together and make some adjustment on the inflation trend of some variables in these two models.
DIFF is a policy dummy variable being 1 for the post-reform period and 0 for the pre-reform
period, and INS is a comparison variable being 1 if covered by public health insurance and 0
otherwise. INSDIFF is the interaction between DIFF and the comparison variable INS.
3.3.3.1. Public health insurance effects on medical service utilization
Table 6 shows the difference-in-difference results for medical service utilization model. We
find that the coefficient of the year dummy variable DIFF, i.e.,
1
, is equal to 1.797, and the
positive effect of DIFF on MEDUTI is significant. It means, for people not covered by public
health insurance, the reform in 1998 increases their medical service utilization, which shows the
time trend and is consistent with our prediction.
21
The coefficient of the comparison dummy variable INS, i.e.,
2
positive effect of INS on MEDUTI is significant too. It means, in 1997 when the public health
insurance reform has not be enforced yet, people covered by public health insurance more prefer
to utilize medical service when falling sick, compared with people not covered by public health
insurance, as predicted. This variable reflects the health insurance status effect on medical
service utilization, independent of time.
The coefficient of the interaction of the year dummy variable and the comparison dummy
variable INSDIFF, i.e., 3
, is equal to -0.336, and the negative effect of INSDIFF on MEDUTI

is significant too. It means that, the positive effect of public health insurance INS on MEDUTI is
significantly decreased after the reform. This result is also consistent with our prediction, i.e.,
Chinese public health insurance reform in 1998 introduced demand management and hence
partially controlled the patients ex post moral hazard problem.
3.3.3.2. Public health insurance effects on medical service expenditures
Table 7 shows the difference-in-difference results for medical service expenditure model. We
find that the coefficient of the year dummy variable DIFF, i.e.,
1
positive effect of DIFF on MEDEXP is significant. It means, for people not covered by public
health insurance, the reform in 1998 increases their medical service expenditure, which shows
the time trend and is consistent with our prediction.
The coefficient of the comparison dummy variable INS, i.e.,
2
positive effect of INS on MEDEXP is significant too. It means, in 1997 when the public health
insurance reform has not be enforced yet, people covered by public health insurance spend more
on medical service consumption when falling sick, compared with people not covered by public
health insurance, as predicted. This variable reflects the health insurance status effect on medical
service expenditure, independent of time.
The coefficient of the interaction of the year dummy variable and the comparison dummy
variable INSDIFF, i.e., 3
, is equal to 0.307, however the effect of INSDIFF on MEDEXP is

not significant. It means that Chinese health insurance reform in 1998 does not affect the positive
effect of public health insurance on medical service expenditure. The explanation is that although
Chinese public health insurance reform since 1998 partially controls patients moral hazard
problem with demand management, China does not implement supply management and therefore
the rising cost of medical service and physicians moral hazard lead to patients high medical
expenditures.
3.3.3.3. Effects of control variables
For medical service utilization MEDUTI, the predictive control variables are education, age,
health status, and area. EDU and AGE both significantly positively affect MEDUTI, as predicted.
Three health status variables HEALTH1, HEALTH2, and HEALTH3 all significantly negatively
affects MEDUTI and the effect of HEALTH1 is stronger than that of HEALTH2 which is stronger
than that of HEALTH3, as predicted. AREA significantly positively affects MEDUTI, meaning
people living in the eastern area of China more prefer to utilize medical facility, which is
consistent with our prediction too.
For medical service expenditure MEDEXP, the predictive control variables are income, age,
and health status. INCOME and AGE both significantly positively affect MEDEXP, as predicted.
Three health status variables HEALTH1, HEALTH2, and HEALTH3 all significantly negatively
affect MEDEXP and the effect of HEALTH1 is stronger than that of HEALTH2 which is stronger
than that of HEALTH3, as predicted.
22
In these two difference-in-difference models, we find that although INCOME does not affect
MEDUTI, it has significant impact on MEDEXP. One of the reasons is that people with higher
income prefers to spend more on medical service, although they do not have higher preference in
utilizing health facility after falling sick compared with lower income people. We also find that
although EDU significantly positively affects MEDUTI, it does not have impact on MEDEXP.
One of the reasons is that people with higher level of education on the one hand are more aware
about the necessity of health care and hence more prefer to utilize health facility when falling
sick, while on the other hand are more efficient in using health input and hence the impact on
medical service expenditure may be neutral.
Meanwhile, cost of treatment of cold or flu COST2, employed as the proxy for average
price of the facility, does not affect MEDUTI, while significantly positively affect MEDEXP. The
reason why higher cost doesnt lead to lower MEDUTI is that physicians have severe moral
hazard and can induce patients demand in China. Now that the medical service utilization is
not affected by higher cost of medical service, the latter leads to higher MEDEXP.
23
Table 6 Difference-in-Difference Model for Medical Service Utilization
Coefficient Std.Error
INTERCEPT -4.109 0.415 ***
EDU Index for Education Level (+) 0.018 0.006 ***
INCOME Annual Income (+) 0.022 0.018
INS Public Health Insurance Status (+) 0.354 0.114 ***
GENDER Gender (+/-) 0.072 0.098
AGE Age (+) 0.016 0.004 ***
MARRY Marital Status (+/-) -0.170 0.176
OCC Occupation Dummy (-) 0.215 0.154
HEALTH1 Self-assessed Health Dummy (-) -1.988 0.238 ***
TIME1 Travel Time to Facility (-) 0.000 0.002
COST1 Travel Cost to Facility (-) -0.108 0.072
TIME2 Waiting Time at the Facility (-) 0.004 0.001 ***
COST2 Cost of Treatment of Cold or Flu (-) 0.041 0.029
AREA Dummy for Area (+) 0.296 0.098 ***
DRUG Western Medicine Available Dummy (+) -0.078 0.081
DIFF Year Dummy before and after reform (+) 1.797 0.175 ***
INSDIFF Interaction between DIFF and INS -0.336 0.202 *
CHI-squared 587.984
Restricted log likelihood -1854.392
Log Likelihood Function -1562.251
CHNS Pooled (n=5611)
Logit
24
Table 7 Difference-in-Difference Model for Medical Service Expenditure
Coefficient Std.Error
INTERCEPT -8.869 1.299 ***
EDU Index for Education Level (+) 0.015 0.020
INCOME Annual Income (+) 0.112 0.061 *
INS Public Health Insurance Status (+) 1.102 0.373 ***
GENDER Gender (+/-) 0.423 0.321
AGE Age (+) 0.053 0.012 ***
MARRY Marital Status (+/-) -0.134 0.571
OCC Occupation Dummy (+/-) 0.202 0.460
TIME1 Travel Time to Facility (+/-) -0.005 0.007
COST1 Travel Cost to Facility (+/-) 0.049 0.247
TIME2 Waiting Time at the Facility (+/-) 0.009 0.004 **
COST2 Cost of Treatment of Cold or Flu (+/-) 0.165 0.101 *
AREA Dummy for Area (+) 0.361 0.321
DRUG Western Medicine Available Dummy (+) -0.198 0.217
DIFF Year Dummy before and after reform (+) 0.927 0.426 ***
INSDIFF Interaction between DIFF and INS 0.307 0.628
Sigma 6.064 0.199 ***
Log Likelihood Function -2550.886
CHNS Pooled (n=5611)
Tobit
4. SUMMARY AND DISCUSSION
This paper makes a contribution to the literature. We use pooled time series and cross
sectional China Health and Nutrition Survey (CHNS 1997, 2004) data to test the welfare effect
of China health insurance reform enforced since 1998. Medical service utilization and personal
medical service expenditure are employed as dependent variables respectively. We regress them
on public health insurance status and other control variables, including health status, household
income, education level, occupation, age, gender, marital status, travel time and cost to the health
facility, waiting time and cost of treatment of cold or flu at the health facility, and etc.
In the first part of the model, a dichotomous dependent variable proxy for medical service
utilization is regressed on the explanatory variables and we employ the popular logistic function
25
to create the LOGIT model. The variable of public health insurance status is positively related to
the dependent variable, significantly for both waves of the data. This result is consistent with our
prediction, i.e., having public health insurance positively affects the medical service utilization.
Meanwhile, the coefficients of public health insurance status decrease with the time of CHNS
waves released. This result is also consistent with our prediction, i.e., Chinese public health
insurance reform in 1998 introduced the co-payment mechanism and hence partially controlled
the patients ex post moral hazard problem.
The effect of public health insurance status on medical service expenditure is tested in the
second part of the model. With the TOBIT specification, the regression results show that the
variable of public health insurance status is positively related to the dependent variable,
significantly for both waves of the data. This result is consistent with our prediction. Meanwhile,
the coefficients of public health insurance status increases with the time of CHNS waves
released. The explanation is that although Chinese public health insurance reform since 1998
partially controls patients ex post moral hazard problem with demand management, China does
not implement supply management and therefore the rising cost of medical service and
physicians moral hazard lead to patients high medical service expenditure.
Since the public health insurance reform is enforced in 1998, we also evaluate the effect of
reform with the difference-in-difference model in the third part of econometric analysis. For
people not covered by public health insurance, the reform in 1998 increases their medical service
utilization and expenditure, which shows the time trend and is consistent with our prediction. In
1997 when the public health insurance reform has not be enforced yet, people covered by public
health insurance have higher medical service utilization and expenditure when falling sick,
compared with people not covered, which is consistent with our prediction and reflects the health
insurance status effect on medical service utilization and expenditure, independent of time.
Meanwhile, we find that the positive effect of public health insurance on medical service
utilization is significantly decreased after the reform, while is significantly increased on medical
service expenditure after the reform. This result is consistent with the first two parts of the
econometric analysis, i.e., although Chinese public health insurance reform since 1998 partially
controls patients ex post moral hazard problem with demand management, China does not
implement supply management and therefore the rising cost of medical service and physicians
moral hazard lead to patients high medical service expenditure.
In summary, the empirical results provide evidence that the reform of China public health
insurance system is successful in the sense of improvement in medical service utilization.
However, wasteful medical spending caused by public health insurance was not affected by the
reform in 1998, although the reform designs a new co-payment mechanism. Two main reasons
might be that (1) the cost of medical service keeps rising and (2) physicians moral hazard
problem is severe in China. Theoretically, the over-consumption of medical services should be
controlled not only by demand management such as co-payment, but also by supply management
like managed care. Since China has not implemented managed care in health care system yet, so
the medical expenditure could not be controlled efficiently even after the enforcement of public
health insurance reform.
The possibility of future modification and extension for this research includes: first, the effect
of private health insurance should be considered in the empirical analysis. The private health
insurance market in China is currently small, accounting for less than 5% total coverage ratio of
urban population. In addition, the information about private insurance is so limited in the CHNS
26
dataset that the effect of private insurance has to be omitted in our studies. However, the private
health insurance market has grown substantially and we can predict it will play more and more
important role in health financing system in the nearly future. Many previous studies provide
evaluation on the mixed public and private health insurance system and indicate private health
insurance represents a more efficient financing method for a public good like healthcare. But
some other studies (Atherly, 2002; Cartwright et al., 1992; Finkelstein, 2002; Stabile, 2001;
Vaithianathan, 2002) show that private health insurance could have some negative impact on the
public health system because supplemental private insurance policies often enlarge moral hazard
and induce over-consumption of medical services. Such conclusions need to be re-tested by
China case. Then the empirical model needs some further modifications, such as econometrically
controlling for the endogenity of the insurance choice decision.
Second, health care provider behavior need to be further studied in the empirical analysis.
Weve found that the wasteful medical spending caused by public health insurance was not
affected by the reform in 1998, although the reform designs a new co-payment mechanism,
which is partially because of physicians severe moral hazard behavior. However, short of the
relevant data in CHNS, how physicians behavior affects the medical service utilization and
expenditure is not provided in this empirical analysis, which should be dealt with in the future
study.
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WELFARE EFFECTS OF PUBLIC HEALTH INSURANCE REFORM: THE CASE OF

, is equal to -0.336, and the negative effect of INSDIFF on MEDUTI

, is equal to 0.307, however the effect of INSDIFF on MEDEXP is

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