Moral hazard in physician prescribing behavior: evidence from China’s Zero-Markup Policy

In this study, we investigate the moral hazard associated with physician prescription patterns in the context of China’s Zero-Markup Policy (ZMP), which annuls markups on Western medications while exempting Traditional Chinese Medicine (TCM). Using a distinctive dataset of administrative records, we investigate the influence of patient insurance status on the consumption of drugs, with a discerning focus on the disparate utilization of Western drugs and TCM. Our empirical results reveal a pattern in which insured patients exhibit increased expenditure on TCM and decreased outlay on Western drugs relative to their uninsured counterparts, suggesting that physicians are incentivized to prescribe profit-generating TCM rather than Western drugs with zero markup. A heterogeneity analysis confirms the consistency of these findings across varied health insurance schemes and a pronounced tendency among patients aged over 30. Our findings illuminate the dynamics of provider-induced demand in the pharmaceutical sector under China’s ZMP, contributing to the discourse on policy-induced perverse incentives in healthcare provisioning.