China's health reforms of the 1980s led to privatization of rural health care with adverse impact on farmers. A decade later a new rural co-operative medical scheme (RCMS), was piloted throughout many provinces to promote better equity. Although many schemes later collapsed owing to inadequate funding, some continue to the present. This article compares such a scheme with the out-of-pocket system in Henan province. We study the township hospitals, focusing on cost of services, utilization rates and impact of RCMS on hospitals' financial sustainability. Our results derive from monthly hospital records and a survey of four hospitals in two adjacent counties, one county with low-premium RCMS and the other with the out-of-pocket system.

All hospitals charged for preventive activities (such as antenatal care, immunization), an unfortunate consequence of limited government support. It was not clear that on average, the total cost of individual patient visits in RCMS hospitals was lower than non-RCMS hospitals. Farmers were generally unaware of their insurance entitlements, except the catastrophic illnesses for which there was a real benefit from refund of US$100 or more. Although the effect of the RCMS on hospital charges was unclear it was notable that the utilization rates in RCMS areas were twice those in non-RCMS.

We conclude that RCMS hospitals were better funded because of re-imbursements from the insurance scheme and therefore were more viable as sources of good health care. Thus, health care could become more equitable under RCMS than the out-ofpocket system. China is now beginning to test a revised form of RCMS with pooling at the county level, increased premiums (10 yuan per person) and increased government funding. However, it must be followed closely to determine the effect on rural services and health care costs for farmers.