Economics Research Seminar Series: Xiaoyan Lei

Xiaoyan Lei (Peking University) will present his paper "Physician-Induced Demand: Evidence from China’s Zero-Markup Regulation on Drug Prices" at  the Economics Research Seminar Series.

Abstract:

This paper builds a physician-induced demand model of medical services and examines the results by exploring the impact of financial incentives on medical care provision, based on a natural experiment in China’s health care reform, in which the government changed provider financial incentives by eliminating the price markup of prescription drugs in public hospitals. Using a unique sample of claims data and taking advantage of the variation in the timing of reform in township healthcare centers and county hospitals, we found many novel patterns consistent with the model of physician induced demand: The reform decreased the drug spending by fifty-eight percent and it was jointly caused by the reduction in drug price and quantity. In the meantime, we found the reduction in drug spending is almost fully substituted by raising non-drug spending, resulting in insignificant change in total medical spending, indicating that providers do respond to financial incentives in order to maintain their income. The result is supported by compositional change in behaviors across different drugs: the reduction in usage is larger for drugs with larger price decline.

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