China's current strategy to improve how health services are paid for is headed in the right direction, but much more remains to be done. The problems to be resolved, reflecting the setbacks of recent decades, are substantial: high levels of out-of-pocket payments and cost escalation, stalled progress in providing adequate health insurance for all, widespread inefficiencies in health facilities, uneven quality, extensive inequality, and perverse incentives for hospitals and doctors. China's leadership is taking bold steps to accelerate improvement, including increasing government spending on health and committing to reaching 100% insurance coverage by 2010. China's efforts are part of a worldwide transformation in the financing of health care that will dominate global health in the 21st century. The prospects that China will complete this transformation successfully in the next two decades are good, although success is not guaranteed. The real test, as other countries have experienced, will come when tougher reforms have to be introduced.