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China's health policy in the 1980s followed its economic policy of marketization. China shifted health financing from public to private and commercialized the country's public health services. Unwittingly, the Chinese government did not grasp the serious market failures in health care, which resulted in a profit-driven public health service in which patients pay directly for services. China's health policy created three major unintended consequences: disparity between rural and urban residents, poor quality of health care, and rapid inflation in health expenditures. Since 2003, China has tried to correct its policy mistakes through public financing and by establishing social health insurance. However, strong profit motives have become embedded within the culture of medical professionals and have eroded the professional ethics that prioritize medical practices for patients' benefits. Restoring medical ethics is a formidable challenge. This paper analyzes the transformation of the Chinese health system and its ongoing challenges.