Events

This paper explores the impact of financial incentives on the provision of medical care, based on a natural experiment in China’s health care reform. The government changed provider financial incentives by eliminating the price markup and regulating the type and procurement of prescription drugs in public hospitals. The analysis uses a unique sample of claims data and takes advantage of the variation in the timing of reform in township health care centers and county hospitals. The findings show that the reform decreased spending on drugs by 52 percent, and the decrease was jointly caused by reductions in drug prices and quantities. However, the reduction in spending on drugs was almost fully substituted by increased non-drug spending, resulting in insignificant change in total medical spending. These findings indicate that providers respond to financial incentives to maintain their income. The results are supported by compositional change in behaviors across different drugs: the reduction in usage was larger for drugs with a greater decline in price. Further investigation of measures of quality of care reinforces this finding: the length of hospital stays was extended, with no significant improvement in quality of care, as measured by the readmission rate, implying that the behavioral changes may just be responses to financial incentives.