Shenmu County Hospital also incurred fines for failure to control costs. Its president Ma Baoyu reasoned that cost control was more difficult a task for bigger hospitals with superior medical apparatus and skills because they receive more seriously ill patients than others do. However, he assured that his hospital had tightened up on the control of medication costs, "mainly through rational medication to avoid waste," as he said.

Since controlling costs by avoiding unnecessary checks and cutting back on prescriptions of costly drugs, Daxing Hospital has regained its designated medicare status. President Li Zenghou believes that controlling costs is as important as ensuring medical quality and safety.

The Shenmu county government has also strengthened its supervisory efforts. Self-auditing in these designated hospitals is now the first line of defense, the second being regular hospital tours by inspectors to make sure that funds are appropriately spent.

After peaking in April 2009, medical costs in Shenmu declined and stabilized.

Wider Application Possible

Visitors come from all over the country to learn from the Shenmu experiment. Among them is Wang Zhenyao, director general of the Department of Social Welfare and Promotion of Charities, Ministry of Civil Affairs. The purpose of his visit to Shenmu was to find a way of treating impoverished children with serious illness.

Wang Zhenyao has since said in an interview, "Shenmu stands out in that it has adjusted many people's concept of reform, my own included." Wang sees the medicare experiment as a public welfare concept. "The Shenmu reforms have shown us a good way of thinking, whereby action starts with the needs of the people."

Wang moreover believes that instituting the free medicare program at an annual cost level of RMB 300-400 per capita presents no problem in at least half of the country.

The actual expenditure of Shenmu's free medicare program totaled RMB 149 million in 2009. Excluding the RMB 30 million medical insurance funds from national, provincial and municipal allocations, the actual local financial investment was RMB 120 million. The budgeted RMB 150 million was hence still in surplus.

This latest medical reform also increased the reimbursed proportion of hospitalization fees from 40 percent to 84 percent. Moreover 93.36 percent of the hospitalized patients in 2009 were rural residents. Zhang Bo was particularly excited about this last fact. "Farmers have benefited most from this program. Many impoverished rural families now have the solution to their greatest problem," he said.

Guo Baocheng believes that the Shenmu government has also benefited from the pilot program. County revenue in 2008 stood at RMB 6.7 billion, and had jumped to RMB 9.3 billion in 2009. Guo thinks this rise is either directly or indirectly related to policies that benefit the people, because when people have no health worries, the wealth they create exceeds by far the cost to the county of free medicare. The purchasing power of Shenmu residents' has increased 22 percent over what it was in 2008, according to statistics.