# Fiscal Incentives and Health Risk Protection: How Central–Local Fiscal Relations Shape Rural Households’ Medical Burden in China

## TL;DR

This study shows how local and central government financial policies in China affect the medical costs of rural households, with different impacts in different regions.

## Contribution

The paper introduces a dynamic game framework and empirical analysis to reveal how fiscal incentives and regional factors influence rural medical burdens under China's NCMS.

## Key findings

- Local fiscal matching subsidies reduce catastrophic health expenditures under central transfer payments' income effect but may increase them under substitution effects due to local non-cooperation.
- NCMS compensation spending mediates the impact, with stronger effects in eastern regions, developed secondary industry areas, and regions with higher fiscal self-sufficiency.
- The study highlights regional heterogeneity and offers policy guidance for fiscal and healthcare reforms in China and similar contexts.

## Abstract

What are the main findings?
Local fiscal matching subsidies significantly reduce catastrophic health expenditures for rural households under the income effect of central transfer payments but may increase them under substitution effects due to non-cooperative behavior by local governments.New Rural Cooperative Medical System (NCMS) compensation spending serves as a mediating channel, and the effects exhibit significant regional heterogeneity, being more pronounced in eastern regions, areas with a more developed secondary industry, and regions with higher fiscal self-sufficiency rates.

Local fiscal matching subsidies significantly reduce catastrophic health expenditures for rural households under the income effect of central transfer payments but may increase them under substitution effects due to non-cooperative behavior by local governments.

New Rural Cooperative Medical System (NCMS) compensation spending serves as a mediating channel, and the effects exhibit significant regional heterogeneity, being more pronounced in eastern regions, areas with a more developed secondary industry, and regions with higher fiscal self-sufficiency rates.

What are the implications of the main findings?
The findings provide new evidence on how intergovernmental fiscal incentives shape medical economic risks under the NCMS.It offers actionable policy implications for fiscal and healthcare reforms in countries with similar contexts to China, particularly regarding defining local fiscal matching boundaries and leveraging transfer payments to advance the integration of urban-rural basic medical insurance.

The findings provide new evidence on how intergovernmental fiscal incentives shape medical economic risks under the NCMS.

It offers actionable policy implications for fiscal and healthcare reforms in countries with similar contexts to China, particularly regarding defining local fiscal matching boundaries and leveraging transfer payments to advance the integration of urban-rural basic medical insurance.

Background: The majority of the funding for the New Rural Cooperative Medical System (NCMS) is derived from fiscal subsidies, comprising central transfer payments and local fiscal matching subsidies. Local governments’ strategic behavior in response to central transfer payments may further impact NCMS compensation spending and medical economic risks. Methodology: Accordingly, this paper investigates, from both theoretical and empirical perspectives, the impact pathways through which local fiscal matching subsidies influence the medical economic risks faced by insured rural households, with central transfer payments serving as a moderating factor. This paper constructs a dynamic game framework involving the central government, local governments, and household sectors. It further applies a mediation effect model and related econometric methods to conduct empirical analysis using 87,630 observations from the China Family Panel Studies (CFPS). Results: The results show that, first, local fiscal matching subsidies significantly reduce catastrophic health expenditures for rural households under the income effect of central transfer payments. However, under the substitution effect, the opposite occurs, as local governments adopt non-cooperative strategies in response to central transfer payments. Second, these impacts exhibit regional heterogeneity, with stronger effects in eastern regions, regions with more developed secondary industries, and regions with higher fiscal self-sufficiency rates. Third, local fiscal matching subsidies influence medical economic risks through compensation spending, under the moderating role of central transfer payments. Conclusions: This paper provides a novel perspective on why the NCMS struggles to provide effective protection, thereby enriching the existing literature. Furthermore, it provides policy guidance for fiscal and healthcare reforms in countries with similar contexts to China. Based on these insights, we argue that, during the future integration process of the Basic Medical Insurance for Urban and Rural Residents, clear boundaries should be defined for local fiscal matching subsidies, and the moderating role of central transfer payments should be strategically leveraged.