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Introduction Low-income households face disproportionate out-of-pocket hardship when accessing healthcare, undermining equity and universal health coverage. To address these challenges, China implemented a three-tiered health coverage system—basic medical insurance, catastrophic medical insurance and medical assistance—but its comprehensive impact on the financial protection remains underexplored.Methods We analysed Shaanxi Province’s Medical Assistance database (2013–2016) to evaluate the impact of China’s multitiered health coverage system on financial protection by: (1) estimating the incidence of catastrophic health expenditure (out-of-pocket payments> 25% of annual income) and medical impoverishment (postpayment income <US$1.90/day) before and after reimbursement—lower incidence indicating better protection and (2) assessing income-related inequality and inequity using concentration indices and horizontal inequity indices (ranging −1 to 1, where zero indicates equality/equity, negative values indicate pro-poor and positive values pro-rich distributions). All estimates accounted for household-level clustering.Results A total of 667 055 households were included. After reimbursement, the incidence of catastrophic health expenditure fell from 58.59% (95% CI: 58.47 to 58.70) to 17.89% (95% CI: 17.79 to 17.97) and medical impoverishment from 41.43% (95% CI: 41.30 to 41.54) to 13.47% (95% CI: 13.38 to 13.55), driven mainly by basic medical insurance and medical assistance. Rural households received larger absolute declines yet remained higher than urban counterparts. Financial protection inequity worsened: the Horizontal Inequity Index for catastrophic health expenditure shifted from −0.0890 (95% CI: −0.0902 to −0.0879) to −0.1717 (95% CI: −0.1746 to −0.1689) and for medical impoverishment from −0.2653 (95% CI: −0.2669 to −0.2640) to −0.5251 (95% CI: −0.5280 to −0.5222), a pattern observed in both urban and rural areas.Conclusion Our findings underscore the need for a three‑tiered health coverage system—including targeted, equitable reimbursement—to advance universal health coverage. Emerging tools such as big data analytics and artificial intelligence offer new ways to monitor and optimise equity; it is timely to extend equity considerations beyond funding mobilisation to reimbursement.