The measures come in response to rapidly increasing medical costs, which greatly surpassed the city's health budget in 2001, the first full budget year following the massive health-care reforms.

"Limiting our medical budget doesn't mean patients won't enjoy high-quality service and effective medicine," said Zhou Haiyang, director of the Shanghai Medical Insurance Bureau. "On the contrary, it guarantees their rights to receive better service at a lower cost."

Zhou said health-care costs are increasing due to expensive but un-necessary medicine and tests, which hospitals sometimes order to earn higher profits.

The municipal government is planning to reduce this year's payments from the city's medical insurance fund by 4 percent from last year, with prescription drug costs dropping by 20 percent.

Every hospital in the city will be given a set budget according to their size and the services they offer, with the bureau auditing their expenses and quality of service on a monthly basis. If a hospital goes over budget, it must pick up the added expenses itself, without any help from the city's health fund.

Previously, some doctors conducted a lot of unnecessary tests and prescribed costly medicine to earn commissions from drug manufacturers. Now, hospitals must control medical expenses, officials said.

"The policy helps to solve patients' long-time complaint that doctors diagnosed unnecessary medicine and performed the same tests repeatedly," said Liu Guohua, vice director of Shanghai Health Bureau.

The new rules are also an attempt to cut off local residents that try to cheat the system. Under last year's reforms, much of the financial burden of health care was moved to residents from the government or employers.

Each person pays a part of his or her own costs, with the health-care fund picking up the remainder. But the system isn't equal, with retired workers paying a smaller part of their expenses than young, employed people.

Some people have used this inequity as a loophole, with younger people paying for medical fees using a parent's or grandparent's health card to reduce costs.

To prevent this practice in the future, the fund will limit the number of hospital visits it will cover per person. The rule makes allowances for those diagnosed with a serious illness, such as cancer, that requires repeated hospitalization.

The government is also encouraging hospitals to develop and provide profitable medical services.

"Hospitals can gain profit by improving their special service departments for the wealthy population who are willing to pay more for better medical service," Liu said.

(eastday.com April 18, 2002)