The Impacts of Drug Price Regulations in China

To lower pharmaceutical expenditure, the Chinese government has replaced the Fixed Percent Markup (FPM) policy with the policies of the Separation of Outpatient Pharmacies from Hospitals (SOPH) and the Zero Markup Drug (ZMD). We build a multistage game theoretic model comprising a hospital and a drugstore to analyze the policies’ impacts on the providers’ drug selection and pricing behaviors. By comparing the equilibrium outcomes, we draw the following conclusions: (i) FPM, especially for one imposing a strict margin ceiling, actually induces an expensive prescription given patients’ great compliance. (ii) Both SOPH and ZMD can conditionally lower patients’ expenditure, and their performances rely on the hospital’s selection. (iii) A proper rate of insurance coverage and a removal of drug rebate are helpful to improve the policies’ performance.