Physician-Induced Demand: Evidence from China’s Drug Price Zero-Markup Policy

We use a natural experiment in China’s health care reform, which the government mandated zero markups for drugs sold public hospitals, to study physician-induced demand medical care. develop theoretical model that robustly predicts drug price markup policy (ZMP) will lead reduction but an increase non-drug services, only when demands and services are at least partially physician induced. Our also yields testable predictions of impact ZMP regarding equilibrium number treated patients. Exploiting staggered rollout unique claims data set, we find that, admission level, reform decreases expenses by 63.4 log points (47.0 percent), is almost fully substituted increases services. Quantitatively similar results obtained hospital levels. show reduces patients as predicted model, has little on quality proxied readmission rate.