Background: Improving the equitable distribution of government healthcare subsidies (GHS), particularly among low-income citizens, is a major goal of China's healthcare sector reform in China. Objectives: This study investigates the distribution of GHS in China between socioeconomic populations at two different points in time, examines the comparative distribution of healthcare benefits before and after healthcare reforms in Northwest China, compares the parity of distribution between urban and rural areas, and explores factors that influence equitable GHS distribution. Methods: Benefit incidence analysis of GHS progressivity was performed, and concentration and Kakwani indices for outpatient, inpatient, and total healthcare were calculated. Two rounds of household surveys that used multistage stratified samples were conducted in 2003 (13,564 respondents) and 2008 (12,973 respondents). Data on socioeconomics, healthcare payments, and healthcare utilization were collected using household interviews. Results: High-income individuals generally reap larger benefits from GHS, as reflected by positive concentration indices, which indicates a regressive system. Concentration indices for inpatient care were 0.2199 (95% confidence interval [CI], 0.0829 to 0.3568) and 0.4445 (95% CI, 0.3000 to 0.5890) in 2002 (urban vs. rural, respectively), and 0.3925 (95% CI, 0.2528 to 0.5322) and 0.4084 (95% CI, 0.2977 to 0.5190) in 2007. Outpatient healthcare subsidies showed different distribution patterns in urban and rural areas following the redesign of rural healthcare insurance programs (urban vs. rural: 0.1433 [95% CI, 0.0263 to 0.2603] and 0.3662 [95% CI, 0.2703 to 0.4622] in 2002, respectively; 0.3063 [95% CI, 0.1657 to 0.4469] and -0.0273 [95% CI, -0.1702 to 0.1156] in 2007). Conclusions: Our study demonstrates an inequitable distribution of GHS in China from 2002 to 2007; however, the inequity was reduced, especially in rural outpatient services. Future healthcare reforms in China should not only focus on expanding the coverage, but also on improving the equity of distribution of healthcare benefits.