The overall goal of the paper is to understand the progress of the implementation of China’s New Cooperative Medical System (NCMS) program. In the paper we seek to assess the strengths and weaknesses of the program and understand its effect on rural residents using a panel of national-representative, household survey data that were collected in 2005 and early 2008. According to our data, we found that there have been substantial improvements to the NCMS in coverage and participation. The service received by rural residents also improved in 2007. While the progress of the NCMS program is clear, there are still weaknesses. Most importantly, the program clearly does not meet its goal of providing insurance against catastrophic illnesses. On average, individuals that required inpatient treatment in 2007 were reimbursed for 15 percent of their expenditures. Although this is higher than in 2004, on average, as the severity of the illness (in terms of expenditures on health care) rose, the rate of coverage fell. The reimbursement rate for illnesses that required expenditures between 5,000 and 10,000 yuan (over 10,000 yuan) was only 11 percent (8 percent). Our analysis shows that the limiting factor is constrained funding.