THE EFFECT OF PRIVATIZATION ON PUBLIC HOSPITALS: EVIDENCE FROM THE HEALTHCARE REFORM IN CHINA

Abstract

In this paper, we investigate the behavior of public hospitals when there is a sudden influx of private hospital entry. During the new round of healthcare reform in 2009, the Chinese government introduced a policy that encouraged the development of private hospitals. Using this policy to implement an instrumental variables approach, we find that the increase in the proportion of private hospitals has led to a change in public hospitals’ hiring behavior. In the face of privatization, the public hospitals began to hire more medical professionals and opts for better ones. How- ever, these public hospitals did not choose to increase in medical equipment or hire more non-medical employees after the policy. We show that comparative advantage and profit-seeking attitudes may be the primary mechanisms for the hospital’s behavior. We also found evidence that privatization has led to improvements in public hospitals’ quality in terms of mortality rates.