Financial conditions, health care provision, and patient outcomes: Evidence from Chinese public hospitals

This paper investigates the impact of health care providers’ financial conditions on the provision of health care, using a policy shock in China – Zero Markup Drug Policy (ZMDP) – which reduces the profits that hospitals obtain from prescribing and dispensing drugs. The study utilizes a comprehensive data set of 117 public hospitals in a major Chinese city from 2007 to 2015 and adopts the difference-in-differences identification strategy based on the staggered adoption of ZMDP. Our findings show that the policy puts financial pressure on hospitals, as their revenue from prescription drugs per patient decreases significantly. In response to the financial shock, hospitals increase revenues from other treatments and procedures per patient, such as imaging tests. Moreover, as hospital revenues become more dependent on medical tests after the policy shock, hospitals increase their capital expenditure on medical equipment. Nevertheless, the study finds no effect of ZMDP on the quality of health care.