The impact of pharmaceutical distribution chain and market dynamics on patients’ medical expenditure: evidence from the Two-Invoice System reform in China

As populations age and healthcare demands increase, the pricing of pharmaceuticals plays a crucial role in determining patients’ out-of-pocket medical expenditure, particularly in China. The Two-Invoice System (TIS) reform, introduced in 2017, aims to lower pharmaceutical prices and reduce patients’ medical expenses by streamlining the pharmaceutical distribution chain. This study integrates a theoretical model with empirical analysis to evaluate the reform’s impact. The model reveals that while removing intermediaries reduces costs, market dynamics may drive price increases due to pharmaceutical monopolies on the supply side. On the demand side, patients’ responses to price changes vary with individual characteristics, adding complexity to the reform’s effects on patients’ medical expenses. Using microdata from the China Family Panel Studies and a Difference-in-Differences approach, we find that the TIS reform significantly reduces patients’ out-of-pocket medical expenditure, with robustness checks confirming the results. Moreover, the policy impact is heterogeneous, with greater reductions observed among patients who are female, elderly, chronically ill, less educated, low-income, or urban residents. This study underscores the TIS reform’s contribution to improving healthcare affordability and highlights areas for further enhancements in the healthcare system.