Small-scale or full-scale? The zero mark-up drug policy in China

Abstract

To reduce citizens’ medicine burdens, Chinese government launched healthcare reform within which the drug pricing policy of the Fixed Percent Mark-up (FPM) is experimentally and gradually replaced by the Zero Mark-up Drug (ZMD) from small-scale to full-scale. We study the impacts of FPM, small-scale and full-scale ZMDs via Hotelling model that depicts the process of providers’ drug brand-selection and pricing and patients’ purchasing behaviors. By analyzing equilibrium results under different policies, we show that FPM does induce the hospital to sell expensive-drug under specific conditions, and both small-scale and full-scale ZMDs can desirably reduce patients’ expenditures without sacrificing providers’ benefits. The critical point is to set the prescription service fee exactly right to reimburse providers’ drug-sale loss. We also conclude that the full-scale ZMD performs more effective than the small-scale.

Keywords:

• China
• Drug policy
• Medical expenditure
• Game theory
• Hotelling

Mathematics Subject Classification:

• 91F10