Can China’s hospital payment reform cut healthcare waste?

One key challenge with DRG-based payment is that hospitals may become reluctant to admit complex patients whose treatment costs are likely to exceed the reimbursement level. Addressing this requires more granular patient classification so that payment better reflects disease severity, comorbidities and treatment complexity. China could also build on emerging local practices, such as in Zhejiang and Beijing, where selected innovative medical devices can be subject to special-case review and, where appropriate, exempted from standard DRG payment. This can help ensure that clinically valuable innovation is not discouraged simply because its cost is not adequately captured within existing DRG tariffs. Ultimately, success should be measured by whether the system improves efficiency without compromising access, quality or outcomes.

China’s hospital payment reform is best understood as a quiet revolution: a move away from rewarding volume and toward rewarding case management. It has already reduced some waste, but it has also pushed hospitals to find new ways to protect margins, which means the fight over efficiency is far from over.

What changed
For decades, Chinese hospitals relied on fee-for-service payment, a system that encouraged more tests, more drugs, and longer stays because each extra service brought in more money.
The new model of payment to fix this situation is DRG/DIP system. DRG (Diagnosis Related Groups) sorts patients into groups by diagnosis and pays a fixed rate for each group. DIP (Diagnosis Intervention Packet) works on a points system: each case earns points, and the value of a point depends on the regional budget. Both put the hospital at risk if it spends more than the set amount. If it spends less, it keeps the difference.
The reform has rolled out fast. China began with pilot DRG cities in 2019 and DIP cities in 2020, and the National Healthcare Security Administration (NHSA) later formalized the system nationwide in 2025, saying it had reached near-full hospital coverage. By the end of that year, 191 of China's 393 insurance pooling areas started using DRG and 200 using DIP, covering about 95% of disease categories and 80% of insurance fund spending.

What has improved
The early evidence points to real savings. In Meishan, Sichuan, researchers found that after DRG began in 2019, total hospital spending fell by about 1.2% a month, patient out-of-pocket costs fell by about 1.5% a month, and average length of stay dropped by about 0.6% a month across 1.6 million inpatient cases in 29 hospitals between 2017-2022. That is exactly the kind of visible waste the reform was designed to curb.
The payment shift has also changed where hospitals make money. A broader study of tertiary public hospitals found that drug revenue and consumables revenue declined by 5% and 3% respectively as a share of total income, while the share from medical services rose by 6%. In policy terms, that is a success: fewer incentives to sell products, more incentives to provide care.

What has not disappeared
The harder truth is that fixed payments do not eliminate profit-seeking; they redirect it. Once a hospital knows what a case will pay, it can still try to maximize earnings by selecting easier patients, shortening stays, or increasing admissions into favourable categories.That is why the warning signs matter. A study of a large tertiary hospital in eastern China found low-value admissions rising sharply from 2022 to 2024, especially short diagnostic admissions. That suggests the system is already producing new forms of gaming even as it restrains the old ones.Readmission rates are another point. In Meishan, 30-day readmissions did not improve, which raises the possibility that some apparent savings came from moving patients through the system faster rather than treating them more efficiently.

Why the next phase matters
China’s newest reform, announced in 2026, tries to address a different issue: not just how hospitals are paid, but where patients are treated. Under the “same disease, same payment” policy, 158 common conditions will receive the same insurer payment within a local pooling area whether they are treated at a top city hospital or a county-level facility.The point is to reduce the pull of tertiary hospitals for routine care. Officials want common cases such as hypertension, diabetes, pneumonia, appendectomy, and hernia repair to flow more naturally to lower-level facilities, easing overcrowding at major hospitals and strengthening grassroots care. At the same time, regulators indicated that this does not mean top hospitals will automatically earn less overall, since fee schedules and patient cost-sharing can still differ by institution level.

Comments
China’s hospital payment reform can cut healthcare waste, but only up to a point. It has already reduced some obvious waste from fee-for-service medicine—especially excess drugs, consumables, and bed days—but it has not removed the incentives that drive hospitals to game the system.The reform is producing measurable benefits, but the evidence should not be read as a simple success story. The Meishan results show monthly reductions in spending, out-of-pocket costs and length of stay, particularly in the early years when hospitals were still adjusting to the new payment rules. Yet the easiest savings are likely to come first. Once hospitals have removed the most obvious sources of inefficiency, finding new ways to save money may become difficult. The reform’s deeper test is whether China can move beyond cost control and realign care with need. That depends not only on payment formulas, but also on patient trust in lower-level hospitals, clinical quality, and whether the system can keep hospitals from simply replacing one set of healthcare waste with another. China needs mechanisms that control unnecessary admissions while protecting access to appropriate care if they really want to cut the healthcare waste.

The issues raised in this article are very relevant to Pakistan as well for its “Sehat Sahulat Program” which has shown how case-based payments can support Universal Health Coverage by making hospital care more affordable and reducing out-of-pocket expenditure for patients. At the same time, it also illustrates that a fixed payment per case can create unintended incentives if it is not supported by strong clinical and claims oversight. The key question, therefore, is not only whether we are paying less, but whether we are purchasing the right care. In my view, the next step for health systems like Pakistan and China is to link payment more deliberately with appropriateness, quality and patient outcomes, while using data and clinical audits to identify unnecessary admissions, variation in care and potential gaming of the system. Simple indicators such as those adopted by the UN Statistical Commission to monitor progress towards the UN SDGs, including coverage of essential health services and the proportion of households with CHE can be considered. Payment reform should ultimately be about getting better value for both the patient and the health system—not simply controlling the cost of each case.

Great article and in my opinion this isn't a China-specific problem, it's what happens to every country that moves from fee-for-service to case-based payment. The Frontiers in Public Health data (low-value admissions up 76.5%, concentrated in the highest-margin cases) is the same pattern Australia and Thailand both hit earlier in their own reforms: fix the price per case, and providers find the next margin, whether that's coding creep or admission selection. Australia responded by excluding hospital-acquired complications from payment and keeping its pricing authority independent. Thailand responded by centralising coding oversight nationally. China is simply at the stage in that cycle where the evidence has surfaced, and it now has two working models to draw from rather than needing to design a fix from scratch.