With people living longer and a higher incidence of chronic diseases, the demand for medical services has been soaring in Beijing, putting growing pressure on the city's health insurance fund.

"It is a fact that medical expenses have been increasing along with the economic growth. In fact, the demand on medical services may be limitless," said Zhang Qingyu, director of the medical insurance office at Tongren Hospital.

Tongren is one of 33 hospitals in the city that now operate within a budget set by the fund, according to an official with the Beijing Municipal Bureau of Human Resources and Social Security.

The program started in July 2011, when four large public hospitals — Friendship, Chao-yang, Tongren and Jishuitan — began to receive fixed grants from the city's health insurance fund.

Previously, the fund would cover all refundable medical services provided by a hospital, no matter how expensive the total cost might be, said the official, who declined to be named.

But with the budget allocated by the city's health insurance fund, hospitals now have to pay if they go over budget, making it essential for them to control costs.

"Otherwise, they will need to pay 8 percent of the deficit," the official said.

This has spurred the hospitals to actively take charge of their costs, by introducing measures such as stricter controls on prescriptions.

Each hospital's budget was based on its premium over the previous three years, with a margin for possible increase of expenditure.

"The budget we received for 2012 was 10 percent more than the public health insurance premium we spent in 2011," said Zhang, who estimated that the premium has increased by an annual rate of 10 percent over the past few years.

By the end of 2012, Tongren Hospital had a 10 million yuan ($1.58 million) surplus, which accounted for about 2 percent of its budget.

Although setting the budgets in this way is not without its drawbacks, Gong Sen, a researcher at the Development Research Center of the State Council, China's cabinet, believes that the budgets have more advantages than risks.

"All methods of payment are flawed, the most prominent problem right now is hospitals providing excessive medical services," he said.

But he cautioned that there are some risks that need to be kept in check, such as when a hospital fails to use the budget right and then tries to stay within the budget by cutting down on the provision of basic services at the end of the year. Or when a hospital tries to make up for the reduced profits resulting from the stricter budget control by overcharging patients not covered by the capital's health insurance, such as those coming to seek medical treatment in the city from other provinces, for whom it's hard to get reimbursement back in their hometown.

However, these risks can be avoided, or at least reduced to a minimum, by using the city's information systems: The health authorities can check the specific data of public hospitals, such as changes in medical costs for both insured and uninsured patients throughout different periods, to detect and prevent possible adverse impacts.