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

• Date: 01 March 2017
• Author: Y. Tony Yang,Brian K. Chen,Karen Eggleston
• DOI: http://doi.org/10.1002/wmh3.222
• Published date: 01 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

Introduction

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.”

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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

services.

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

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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)

reforms.

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