The radical changes which have been taken place in the Chinese economy since the late 1970s have influenced the health sector and the health care financing system. A rapid increase in medical care costs in the last decade has placed a heavy financial burden on the government and enterprises and a vast majority of the rural population. The public service medical scheme for government employees and labor insurance for enterprise workers are facing a great challenge of cost containment through a series of reforms in the mechanisms of fund collection and management. In the meanwhile, the collapse of the cooperative medical care scheme in most rural areas has raised the issue of gaining access to basic health care for the rural population and in particular the poor. This paper provides a description, with some explanation, of how and why the health care financing system had been changed and experienced such a sharp increase in expenditure. In conclusion, how to develop and improve a financing system appropriate to the level of socio-economic development in China is addressed.