This paper estimates the impact of a health insurance reform on health outcomes in urban China. Using the China Health and Nutrition Survey we find that this reform increases the rate of health insurance coverage significantly among workers in Non-State Owned Enterprises. The double difference (DD) estimations show that the reform also leads to better health outcomes: workers are less likely to get sick and more likely to use preventive care. Using an instrumental variable (IV) approach to look at the causal effect of health insurance, we find those with health insurance use more preventive care but do not report significantly better health outcomes, an increase in health care utilisation, or an increase in out-of-pocket medical expenditure.

Introduction

Providing adequate health insurance to the majority of a country’s citizens in a cost-effective manner is a challenge faced by many countries. Given the uncertainty present in the market for health care and the lack of resources faced by individuals and governments in developing countries, the issue is even more acute for less-developed nations. Many developing countries are trying to use social insurance systems and payroll taxes to provide their citizens with equal access to health care (Hsiao & Fraker 2007). Indeed, around 50 percent of countries outside of the OECD finance the majority of health spending using public funds.1 In this paper we look at how China, one of the largest developing countries, expanded health care coverage to a significant proportion of its citizens working in urban areas and the effects that health care expansion had on self-reported health outcomes and the use of preventative care. The results outlined in this paper can provide insights for other large developing countries that are considering expanding health care coverage; the results show how health insurance, while being able to spread financial risks and prevent deprivation of care due to a patient’s inability to pay (Feldstein 2006), may lead to an increase in demand for services. In the early 1990s China had not established a comprehensive health insurance system for all of its citizens. In the urban areas, only employees of government-run facilities and Sate-Owned Enterprises (SOE) were covered. In rural areas, the old cooperative medical scheme had collapsed when the commune was broken up. The poor coverage in urban areas coupled with the downfall of rural coverage meant that the vast majority of the population did not have health care insurance; in fact, in 1998, only 9.5% of the rural population were insured (Liu 2004). Many people could not afford basic health care and families were suffering from high medical expenses (Watts 2006). China sought to remedy the failures in the health care market by introducing reform aimed at expanding insurance coverage to all employees: both those working in SOEs and the private sector. In 1999 a new social insurance system for all urban works was established. In 2003, China re-established the cooperative medical system in rural areas and health insurance was expanded to cover the non-employed, children, the disabled, poor, and aged in urban areas. By the end of 2011, the coverage rate had reached 95% of the population. This paper will focus on the first major expansion, the Urban Employees’ Basic Medical Insurance (UEBMI) Reform, that took place in 1999 and was the impetus for the rest of the health care reforms.