The government plans to set up a diverse offering of medical insurance plans to cover urban employees, unemployed urban dwellers and rural residents. Those covered by basic medical insurance is expected to surpass 90 percent by 2011.

Separately, the government will improve the management and supervision of medical institution operations, develop health service plans, and improve the basic medical insurance system. Public hospitals will receive more government funding and will also be allowed to charge higher treatment fees. But eventually they will be banned from making profits by prescribing expensive medicines and treatments, which is currently a common practice.

Central and local governments will increase investment in the public health sector, local clinics, public hospital subsidies and basic medical insurance plans.

Governments will increasingly control medical service and pharmaceutical prices, with strict regulations limiting charges at non-profit hospitals and the essential drugs they use.

Supervision of medical institutions, health-insurance providers, and pharmaceutical companies and retailers will be strengthened. Governments will also tighten monitoring of drinking water and food and workplace safety.

Three-year plan

Separately, China unveiled a three-year action plan on healthcare reform on April 7 that promises to pump 850 billion yuan ($125 billion) into a three-year action plan from 2009 to 2011.

About 331.8 billion yuan ($48.8 billion) comes from the Central Government and the rest will be invested by local governments, said Vice Minister of Finance Wang Jun at an April 8 press conference. A majority of the Central Government subsidies, he said, will be directed toward China's central and western areas, while eastern provinces with larger local tax revenues will pay the majority of their own reform expenses.

"I believe the investment will be made in time and in full because we gave full consideration to the financial capacities of local governments while drafting the plan," he said.

The State Council set up a working team, led by Vice Premier Li Keqiang, to guide the reform. The team includes senior officials from 16 state departments, the ministries of health and finance and the National Development and Reform Commission. The Ministry of Supervision will oversee funding allocation and spending.

The investment will be prioritized on the five focus areas: universal basic health insurance, the essential medicine system, improving basic medical care and health services, providing equitable access to basic public health services and conducting pilot reforms on state-run hospitals.

Wang did not say how much would be invested in each of the five sectors. He did say, however, that a third of the investment would go to healthcare service providers, hospitals and health facilities, while two thirds of the money would go to patients.

Three different insurance programs already exist in China for urban employees, unemployed urban residents and rural residents, into which governments, employers and individuals contribute.

More than 300 million urban dwellers and 800 million rural residents have joined the three programs, according to the Development Research Center under the State Council.

According to the action plan, the government health insurance subsidy for unemployed urban residents and farmers will rise from 80 yuan ($11.8) per person to 120 yuan ($17.6) per person next year. The three programs' inpatient and outpatient reimbursements will gradually rise.

Officials intend to cover more vulnerable people under the insurance plans. Retirees from bankrupt or financially troubled companies who can no longer afford insurance, migrant workers and the self-employed will all be eligible for the government insurance.

In some places that ran pilot programs to test the new system, planners found more people gathered under the shelter of medical insurance.

Answering a question on how to guarantee local governments' investment in healthcare reform, Wang said at the press conference that local governments would have an investment quota proportional to the Central Government's input in their communities. He said the Ministry of Finance would carry out inspections to make sure central and local government investments would be injected in a timely manner.

Zheng Fengtian, a professor in the School of Agricultural Economics and Rural Development at Renmin University of China, said the success of rural medical reform hinges on whether farmers are willing to pay insurance premiums and whether local governments in central and western areas can afford their shares of the investment.

Zheng, who has studied farmers' medical insurance programs for nearly 10 years, said his field surveys revealed that even a 50-yuan ($7.4) annual premium poses a financial burden on some poor rural families and many young farmers choose not to join an insurance program. He suggested the Central Government should fully subsidize medical insurance premiums for poor farmers and exempt capital input from heavily indebted local governments.

Healthcare Reform Formula

Quota: 850 billion yuan ($125 billion)

Investors: Central and local governments

Time: 2009-11

Funding allocation:

1/3 to healthcare service providers

2/3 to patients

Focus areas:

1. Universal basic health insurance

2. The essential medicine system

3. Improving basic medical care and health services

4. Providing equitable access to basic public health services

5. Conducting pilot reforms on state-run hospitals