Patient Copayments, Provider Incentives and Income Effects: Theory and Evidence from the Essential Medications List under China’s 2009 Healthcare Reform

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.