Seminar（Dept. of Trade Economics）

Title: Has the Shortened Drug Distribution Chain Cut Drug Prices? Evidence from the Implementation of Two-Invoice System in China

Speaker: Nina Yin (Central University of Finance and Economics)

Time: 10:00 (Thursday), May 18, 2023

Venue: Room 1008, Mingde Business Building

Language：Chinese/English

ABSTRACT:

Escalating drug spending has been a crucial issue that has generated intense policy debates in both developed and emerging countries. To improve transparency in drug prices and eliminate excessive profits from multi-tier distribution system, China has implemented a two-invoice system (TIS) since late 2016 - a policy that limits the number of invoices between pharmaceutical manufacturers and end consumers (hospitals). This paper exploits the temporal variation in implementation across provinces (2014-2017) with unique drug procurement-price data at firm-province-month level from 2013-2019 and investigate the impact of TIS on drug prices with staggered Difference-in-Difference method.  Our results indicate that TIS did significantly reduce drug prices nationally. This suggests that TIS is effective in squeezing out price bubbles in the drug distribution process. In addition, we explore the financial data of listed pharmaceutical manufacturers and other healthcare-related upstream and downstream companies. The difference-in-difference analysis shows that selling expenses for pharmaceutical manufacturers increased significantly after the implementation of TIS, while their operating profit margins decreased significantly compared to other healthcare-related firms, including active pharmaceutical ingredient (API) companies, pharmaceutical intermediate manufacturers, medical device manufacturers, etc. The result is interesting in that it echoes the industry’s view that TIS moves the doctor rebates upwards from drug distribution sector to production sector in the forms of selling expenses.