Patient Copayments, Provider Incentives, and Income Effects: Theory and Evidence From the Essential Medications List Under China's 2009 Healthcare Reform

Date01 March 2017
Published date01 March 2017
Patient Copayments, Provider Incentives, and Income
Effects: Theory and Evidence From the Essential
Medications List Under China’s 2009 Healthcare Reform
Brian K. Chen, Y. Tony Yang, and Karen Eggleston
Expanding access through insurance expansion can increase health-care utilization through moral
hazard. Reforming provider incentives to introduce more supply-side cost sharing is increasingly
viewed as crucial for affordable, sustainable access. Using both difference-in-differences and
segmented regression analyses on a panel of 1,466 hypertensive and diabetic patients, we empirically
examine Shandong province’s initial implementation of China’s 2009 Essential Medications List
policy. The policy reduced drug sale markups to providers but also increased drug coverage benef‌its
for patients. We f‌ind that providers appeared to compensate for lost drug revenues by increasing
off‌ice visits, for which no fee reduction occurred. At the same time, physician agency (yielding to
patient demand for pharmaceuticals) may have tempered provider incentives to reduce drug
expenditures at the visit level. Taken together, the policy may have increased total spending or total
out-of-pocket expenditures. Mandating payment reductions in a service that comprises a large
portion of provider income may have unintended consequences.
KEY WORDS: China, pharmaceuticals, Essential Medications List
In 2009, China grappled with chronic challenges to health-care access by
implementing extensive reforms. The Central Communist Party and the State
Council of the People’s Republic of China announced a program through their
“Opinions on Deepening Pharmaceutical and Healthcare System Reform.”
This decision initiated a host of policy instruments, draft rules, and guidance,
and set a new course for the organization and delivery of China’s health-care
The health-care reforms aimed primarily to address the longstanding problem
of the nation’s uninsured and underinsured populations. Yet ensuring access
to essential medical services without encouraging overutilization of health-
care resources is a perennial challenge for policymakers worldwide. In the
United States, for example, the Affordable Care Act seeks to contain cost while
World Medical & Health Policy, Vol. 9, No. 1, 2017
1948-4682 #2017 Policy Studies Organization
Published by Wiley Periodicals, Inc., 350 Main Street, Malden, MA 02148, USA, and 9600 Garsington Road, Oxford, OX4 2DQ.
expanding access through a number of mechanisms such as managed competition,
payment incentives, excise taxes on high-cost plans, as well as medical homes
and accountable care organizations. Likewise, China’s reforms aim to improve
insurance coverage to reduce patient out-of-pocket burden, while constraining costs
by incentivizing provider eff‌iciency. If, for example, lower copayments improve
adherence to recommended therapy (as in the case of patients with chronic disease
faithfully taking their medications), it may also promote welfare gains by improving
both risk protection and health outcomes.
However, both economic theory and previous empirical evidence suggest that
implementation of a demand-side reform—such as expanding insurance or
reducing patient co-payment burden for specif‌ic medications—can be complicated
by a strategic supply-side response. Yet the related theory does not account for the
effects on provider income (e.g., Eggleston, 2005; Ellis & McGuire, 1993; Ma &
McGuire, 1997), which can be large for primary care providers when payment for
basic services changes. Furthermore, studies of these effects in developing countries
are limited. This paper aims to provide an empirical analysis of the interaction of
demand- and supply-side effects of Shandong Province’s initial implementation of
China’s 2010 Essential Medications List—one of the four pillars of China’s 2009
health-care reforms—which reduced providers’ margins from drug dispensing
while increasing prescription drug insurance coverage for patients. The Essential
Medications List policy has continued relevance today, as China remains in the
process of rolling out the policy to public providers across the nation in 2016.
Empirical Case Study: The Essential Medications List in China
Prescribing and Dispensing in China. Physician dispensing and provider reliance on
revenue from drug sales have deep historical and cultural roots in East Asia
(Eggleston, 2012). Physicians’ and hospitals’ practice of supporting themselves
f‌inancially through drug sales (known as “yi yao yang yi” in Chinese)—with
allowed mark-ups of 15 percent or more—is widely decried by the Minister of
Health, and is the explicit target of China’s 2010 Essential Medication List (EML)
China’s long-term EML policy goals include several components. First, the
policy required government-owned primary care organizations to implement a
zero mark-up policy for dispensing drugs to their patients, and they were
prohibited from dispensing drugs not included in the EML. We call this supply-
side EML (SEML), although the reduction in mark-up also constitutes a reduction
in price for consumers. Most local governments allowed providers a transition
period in which they could continue to dispense non-EML drugs and retain some
drug-dispensing revenue. In the county subject to SEML that we study, for
example, this transition period extended from March through June 2010, after
which government primary care organizations may no longer charge a mark-up
for EML drugs or dispense non-EML drugs.
Another component required more generous insurance coverage for EML
drugs than non-EML drugs; we call this demand-side EML (DEML). This
Chen/Yang/Eggleston: China’s Essential Medications List 25

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