The government said new policies would increase prices for medical services, such as surgery and diagnosis, while lowering drug prices by reducing mark-ups and through a government-run medicine procurement scheme focused on lowering costs.

China's underfunded network of 13,500 public hospitals relies heavily on drug sales, contributing to inflated prices, kickbacks and tension between patients and doctors.

About 40 percent of public hospital revenue in 2011 came from prescribing drugs, Health Ministry data show, while medical services accounted for just over half, with government subsidies and other income making up the rest.

Health authorities will also extend to the entire country a special insurance system to help battle major illnesses.

Many people complain that serious illnesses, such as cancer and diabetes, can bankrupt households under the current system, where patients often have to pay much of the cost out-of-pocket.

China will also boost subsidies for basic medical coverage for rural and urban residents by 14 percent to 320 yuan per person annually, the Ministry of Finance said on Tuesday.

More assistance will go to China's poorer western and central areas, as the government looks to close the healthcare quality gap with the east coast and inland regions.