Physician Agency and the Zero-Markup Drug Policy in China: Evidence From a Structural Model

Abstract: This paper quantifies physician agency in China's prescription drug market by exploiting the structural shift created by the Zero-Markup Drug Policy. We find that physicians' prescribing decisions are about three times more sensitive to the hospital's profit margin than to the retail price faced by patients. The study provides several key findings. First, government policy exerts a strong influence on drug prices. Second, branded drugs are generally preferred over generics and display lower price elasticity. Third, the policy accounts for more than half of the observed decline in average wholesale prices. Finally, while the policy improves patient welfare, it reduces pharmaceutical firms' sales and profits, and a partial restoration of drug markups could increase overall social welfare.