China’s New Cooperative Medical Scheme, launched in 2003, was designed to protect rural households from the financial risk posed by health care costs and to increase the use of health care services. This article reports on findings from a longitudinal study of how the program affected the use of health care services, out-of-pocket spending on medical care, and the operations and financial viability of China’s township health centers, which constitute a middle tier of care in between village clinics and county hospitals. We found that between 2005 and 2008 the program provided some risk protection and increased the intensity of inpatient care at township health centers. Importantly, the program appears to have improved the centers’ financial status. At the same time, the program did not increase the overall number of patients served or the likelihood that a sick person would seek care at a township center. These findings serve as a benchmark of the program’s early impact. The results also suggest that the composition of health care use in China has changed, with people increasingly seeking outpatient care at village clinics and inpatient care at township health centers.

The overall goal of the paper is to understand the progress of the design and implementation of China’s New Cooperative Medical System (NCMS) program between 2004 (the second year of the program) and 2007. In the paper we seek to assess some of the strengths and weaknesses of the program using a panel of national- representative, household survey data that were collected in 2005 and early 2008. According to our data, we confirm the recent reports by the Ministry of Health that there have been substantial improvements to the NCMS program in terms of coverage and participation. We also show that rural individuals also perceive an improvement in service by 2007. While the progress of the NCMS program is clear, there are still weaknesses. Most importantly, the program clearly does not meet one of its key goals of providing insurance against catastrophic illnesses. On average, individuals that required inpatient treatment in 2007 were reimbursed for 15% of their expenditures. Although this is higher than in 2004, on average, as the severity of the illness (in terms of expenditures on health care) rose, the real reimbursement rate (reimbursement amount/total expenditure on medical care) fell. The real reimbursement rate for illnesses that required expenditures between 4000 and 10000 yuan (over 10000 yuan) was only 11% (8%). Our analysis shows that one of the limiting factors is constrained funding.