The private hospitals are also exempted from business tax, and their self-made drugs are free from value-added tax during the first three years the hospitals are running, but only if the money they generate is used to improve medical care.

Value-added tax is the tax paid on the difference between what a product costs to make, and what it sells for. The new medical policies were announced by the Ministry of Health on Friday.

It set out a series of reforms and has divided the health-care system into two parts, profit-making and non-profit making, said Liu Xinming, director of the ministry's Planning and Financial Department.

"The government will adopt various financial, taxation and price policies on the two sectors to encourage all of society to invest in the medical service,'' Liu added.

Profit-making hospitals, including Sino-foreign joint-ventures, private clinics, and shareholding hospitals are permitted to fix their medical service prices according to the actual cost of a service and the demand for it.

These private enterprises will also be free from real estate, land and car taxes.

However, independent drug retail shops separate from these profit-making hospitals should pay duties according to law.

When the three-year period expires, all the hospitals will pay taxes as required by law, Liu said.

Official statistics show there are 18 joint-venture hospitals and more than 60 joint-funded clinics in China.

Solely foreign-funded hospitals and clinics are still not permitted in China.

The country now has 6,000 hospitals. The majority are, and will continue to be, non-profit ones, Liu noted.

"The division of the two sectors and these favorable policies given to profit-making ones are designed to introduce a competitive system and improve medical service quality in China,'' said Wu Mingjiang, director of Medical Administration Department of the ministry.

The government will not fix the same prices for all non-profit hospitals — different hospitals will have different prices according to their individual needs, but they must stay within a set price bracket.

"This is to make hospitals focus on improving the quality of their medical services to increase their incomes, instead of depending on selling medicines to patients,'' he said.

Now, only 40 per cent of the income of State-owned hospitals comes from their medical services, and more than half comes from selling medicine, official statistics indicate.

Now, the diagnosis fee for a senior doctor in a big hospital is only about 10 yuan (US$1.2), according to the government's fixed prices, which has forced hospitals to increase drug prices to make ends meet.

Patients complain that it is cheap to see a doctor, but expensive to have a physical check-up and buy prescribed medicines.

In order to give all people quality and cheaper medical care, patients will have more choice and be allowed to select their own hospitals.

Under the old welfare-based system, they had to go to hospitals which have contracts with their employers, and accept the medicine prices whether they liked it or not.

"It is urgent for the country to set up a basic medical network, so that people may see doctors in community clinics instead of always having to go to big hospitals,'' Wu said.

(China Daily)