Soft Budget Constraint And Medical Insurance Fund Expenditure

The duties and responsibilities division between different levels of government has a significant influence on the overall planning and fund balance of the basic medical insurance for urban and rural residents(hereinafter referred to as the basic medical insurance).The “father-son relationship” between the central and local governments impacts the local government's expectation of receiving bailouts and then further influences its behaviors.This is so-called the “soft budget constraint” issue.The existence of this issue in the basic medical insurance and the impact of central-local relationship on the expenditure of basic medical insurance shall be investigated.By investigating the influence of central-local relationship in the basic medical insurance on the cost-control behaviors of the local government,this study explores the existence of soft budget constraint in the basic medical insurance fund.The data referred to in this study are macroeconomic data,mainly from the Finance Yearbook of China,China Statistical Yearbook,and New Rural Cooperative Medical System Statistics.First of all,we study the duties and responsibilities of the central and local governments in the basic medical insurance,and the central-to-local transfer payment for guaranteeing the performance of duties and responsibilities.The basic medical insurance is under the common governance of central and local governments,who jointly assume the responsibility of providing subsidy.By considering the economic development level and the fund balance of the previous year etc.,the central government stipulates the government subsidy standard for the basic medical insurance.And then,we construct a dynamic central-local game model for intergovernmental transfer payment to explain its influence on local government behaviors.Based on the financial strength of the local government,we analyze and compare the local government's behaviors under the situations when the central moves first and when the local moves first.The theoretical analysis indicates that in the basic medical insurance,the central transfer payment,which is aimed to achieve equalization,has different impacts on the local governments with different financial strengths.Compared with the local governments with stronger financial strength,those with weaker financial strength make less supervision efforts.In regions with weaker financial strength,the central transfer payment causes lowered supervision efforts of the local government,resulting in lower fund balance of the basic medical insurance,and more transfer payment from the government in the next year.The theoretical analysis proves the existence of soft budget constraint in the basic medical insurance.To verify the theoretical finding in real situation,we further investigate the new rural cooperative medical system(NCMS)as the example case.Firstly,the transfer payment expectation is applied to measure the degree of soft budget constraint and the One-step SysGMM is used to explore the existence of soft budget constraint in NCMS.After that the fiscal decentralization level is used to evaluate the soft budget constraint,and the fixed effect(FE)model is applied to investigate the influence of different financial situations on the degree of soft budget constraint.The empirical analysis indicates that the NCMS system is faced with the soft budget constraint issue.The increase of central transfer payment lowers the fund balance of NCMS.The higher level of fiscal decentralization means the harder budget constraint.The conclusions of this study are mainly in two aspects.First of all,there is soft budget constraint in the basic medical insurance.The central transfer payment,which is aimed to achieve equalized capability of providing basic public service between regions,leads to strategic behaviors of local governments.When the local government anticipants that the central government provides transfer payment based on the last year medical insurance balance,it will lower the supervision efforts,resulting in lower medical fund balance,and more transfer payment from the central government.Secondly,the local governments with different financial strengths may be faced with different soft budget constraint levels.The local financial strength is a key parameter influencing the soft budget constraint level.Regions with higher fiscal centralization and economic levels are faced with harder budget constraints.On the contrary,regions with lower fiscal centralization and economic levels are faced with softer budget constraints.To harden the budget constraint,three countermeasures are suggested in this paper.First of all,the budget legislation principle shall be strictly followed and carefully implemented to harden the central government budget constraint,thus to strap the central government's power of providing arbitrary bailouts for local governments.Secondly,based on the integration of health care items,the regulation and management shall be separated,and the competitive mechanism shall be introduced among the management institutions to mobilize their cost-control impetus.Thirdly,the financial autonomy of local governments shall be properly increased and their financial strength shall be improved.There are two innovations in this study.The basic medical insurance for urban and rural residents involves the relationship among the central government,local government,and management institutions,while the budget soft constraint generally concerns the relationship between the budget constraint organization and the aid organization.Considering that the local government has the power of appointments and removals and that the medical insurance management institution is the perfect agent of local government,this paper considers the local government and the management institution as one and investigates the influence of central transfer payment on the cost-control behaviors of local health care institutions.This is the first innovation.The traditional study on budget soft constraint takes the central affluence as the cut-in point,and studies the local's expectation of receiving bailouts and its influence on local's behaviors.By contrast,this study takes the local affluence as the cut-in point,and investigates the influence of local affluence on the local's expectation of receiving bailouts and its behaviors,when the central affluence is fixed.This makes the second innovation.