In the fairy-tale history of Chinese health care, a good wizard called Mao Zedong sent “barefoot doctors” into the countryside to heal the Chinese peasantry, arming them with vaccines, medicines, modern hygiene and the basic techniques of western and traditional Chinese medicine.

The barefoot doctors were spectacularly successful until a bad fairy called Market Forces came along and drove them all away. Ever since then, China’s health care has been getting worse and worse – especially in the countryside – and epidemic diseases have once again been on the rise.

This fairy tale has a powerful hold on the debate over Chinese health care reform, but data belie the notion of a collapse in Chinese health care comparable to 1990s Russia, where life expectancy fell, mortality rates rose and the prevalence of tuberculosis and other diseases soared.

Of the 12 key health outcomes we examined for a recent survey of the health care system published in China Economic Quarterly, China ranks ahead of India on all 12, ahead of Brazil on eight, ahead of Russia on five and ahead even of the US on two. China’s performance on most indicators has improved, not declined, over the past decade.

China’s health care system has huge problems, especially in the countryside. The underlying issue is not that health care has collapsed but that it has failed to keep up with rapid changes in the nature of health care demand. Up through the mid-1980s, China’s health care challenges were those of a very poor agricultural society: reducing infectious and epidemic disease and cutting back on infant and maternal mortality. Better hygiene and command-and-control social engineering pretty much did the trick.

Since then, China has transformed itself into a middle-income, rapidly urbanizing society, and its big health challenges increasingly are chronic diseases like heart disease, cancer and diabetes, as well as the higher standard of basic care demanded by wealthier and better-educated urban consumers.

The biggest problem with health care delivery in China is the lack of a coherent system for primary care that can efficiently meet these new demands.

In theory, China has a wide network of health care facilities. Despite its enormous population (which normally makes China look bad on per-capita measures), the availability of doctors and hospital beds is quite respectable. Urban China has as many doctors per capita as South Korea and more hospital beds per capita than the US.

This statistical surfeit, however, is illusory. When measured by value provided, Chinese health care is concentrated in a small number of mostly state-owned hospitals. The vast ranks of small clinics – mostly private – play virtually no meaningful role in health care delivery.

China’s 18,000 hospitals make up just 6 percent of the nation’s 300,000 health care facilities, but account for 60 percent of patient visits. Urban hospitals are just 4 percent of all facilities, but consume fully half of all health care spending in China, up from a third in 1990.

At the other end of the spectrum, outpatient clinics make up nearly half of all health care facilities but in 2005 accounted for just 2 percent of patient visits and only 12 percent of health care spending, down from 21 percent in 1990.

Health care is now essentially a profit-making activity and tends to get concentrated in hospitals that benefit from government favouritism, achieve economies of scale, and serve patients who will pay the most money. These hospitals are not very efficient. But their grip on the system makes it hard to create space for a more flexible network of smaller-scale primary care facilities.

Private clinics are not eligible for reimbursement by either of China’s two large public medical insurance programs – the Basic Medical Insurance program for urban employees and the New Rural Cooperative Medical System. They are also taxed at higher rates since they are unable to obtain the non-profit status that public hospitals enjoy.

Meanwhile, most state-owned hospitals are officially classified as ”non-profit,” even though they depend on patients for the vast majority of their revenue and thus operate as de facto for-profit enterprises. Managers and doctors enjoy fatter pay packages when revenue increases.

In 2006, the State Council formed a healthcare reform “small group” headed by then-health minister Gao Qiang and by Ma Kai, head of the National Development and Reform Commission. The public is still waiting for the group to unveil its reform plan, but what little information has leaked out indicates that a key topic of debate is the role of private health service institutions.

Though the Chinese government is right to be sceptical of the profit motive in health care given the example of America’s dysfunctional health finance system, the current health delivery system combines the worst aspects of free-market and state-run systems. To meet the health care demands of a modern, urbanised society, greater public funding of health delivery is surely necessary. But so is an expansion of the role of private clinics.