Another revolution coming in China

By Jim Jubak

Health care spending doubled from 2002 to 2007.

Tens of millions of people aren't covered by any health insurance, and millions who had insurance have lost it as a result of the global economic crisis.

Despite the rise in health care spending, the population isn't getting any healthier. Infant mortality rates have stopped declining. Diseases once under control have re-emerged.

Too many people live in fear that they're only one illness away from poverty.

Yep, things sure are bad . . . in China. So bad that, in January, the Beijing government announced a plan to spend $124 billion by 2011 to provide some form of health insurance to 90% of the population.

That's a huge amount of money. Yes, the dollars being thrown around in our own health care debate are larger: The draft bill being debated in the Senate Finance Committee carried a price tag of $856 billion when introduced. But that would be the cost for 10 years.

The Chinese price tag of $124 billion for two years is impressively large when you consider that China is still a relatively poor country. U.S. gross domestic product hit $14.3 trillion in 2008, estimates the CIA World Factbook. The factbook puts the size of China's economy at $4.4 trillion, using the official exchange rate, or $7 trillion at what's called purchasing power parity. (Purchasing power parity attempts to adjust official figures to take into account what people in different countries actually pay for the same goods and services.)

A radical and profitable change

Either way you look at it, spending more than $60 billion a year to improve health care in China has the potential to be revolutionary.And I think it will be exactly that. Especially if it is, as I think likely, just the first wave of government spending in areas such as health care, education and retirement pensions. We are looking at the beginning of revolutionary change in the Chinese economy.

For investors, that revolution will totally change how to make money in China.

Let me explain what's so revolutionary about spending $124 billion over two years.

The goals of the plan seem modest enough. The government wants to extend some form of health insurance to 90% of the Chinese population. "Some form" is the key. Each person covered would get an annual subsidy worth about $17 beginning in 2010. Medicines would be covered by the insurance. Some of the money would go to improving health centers in rural areas, and efforts would be made to reform the operation of public hospitals.

Now, $17 a year per person doesn't seem like much, and indeed it's not in the developed economies of the world. It's a much bigger deal in rural China, which is much poorer than the urban areas.

Video: Counting on China's economic recovery

In the first quarter of 2009, according to a nationwide government survey, the average household in rural China showed an annual income of $237 at official exchange rates. Rural households average 4.5 people (or at least they did in 1995, which is the most recent data I could find). In a household of four people, the new plan would provide an annual budget of $68 a year. That's a big percentage on a household income of $237.

Cash and apothecary

The effect, though, is even greater if you look at the way China's health care system works now. Everything requires a cash payment from the minute you walk through the door.

I'm going to take a few details from a description of a hospital visit by Bill Siggins, who had surgery in a Chinese hospital to remove his appendix. (You can read the complete account here.)

The first charge was 10 yuan, about $1.40, to register. After a preliminary diagnosis, there were tests to confirm the diagnosis. Test costs totaled $100. Fortunately for Siggins, an operating room was available, but it required a $730 deposit. In recovery, a thermometer cost $1.40. Patients and their families are supposed to provide things like a bowl, a spoon, towel and soap. Food tickets for meals cost about $2.20. (The system reminds me a bit of the last flight I took on a low-cost airline in Europe.)

This account doesn't take us down into the pharmacy, which in many ways is a much more wrenching economic experience than the hospital itself. With the end of much government support for the hospitals, the pharmacies attached to hospitals have become major profit centers. Pharmacies are allowed to charge a 15% markup over the wholesale prices of drugs.

That doesn't seem like much. But pharmaceutical sales provided 43% of revenue at China's general hospitals in 2005, according to a 2009 paper by Meredith Wen, "Averting Crisis: A Path Forward for China's Healthcare System." In that same year, government funding provided almost 7.4% of general hospital revenue. That figure had been 10.2% in 2002.

Continued: Save or die

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