📈 economics

Impact of National Medical Insurance Purchases for Innovative Drugs on Pharmaceutical Firm R&amp;D Investment—A Policy Study Based on Medical Insurance Access Negotiation in China

This study utilizes a multi-period difference-in-differences model on data from 335 Chinese pharmaceutical firms (2010–2024) to demonstrate that China's medical insurance negotiation policy successfully stimulates corporate R&D investment by leveraging a "volume-for-price" mechanism that balances drug cost containment with innovation incentives.

Original authors: Fenghong Yang, Fanyue Meng, Rui Wang, Lu Zhang, Jinxi Ding, Jiaming Li

Published 2026-09-25

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CC BY 4.0

Original authors: Fenghong Yang, Fanyue Meng, Rui Wang, Lu Zhang, Jinxi Ding, Jiaming Li

Original paper licensed under CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). ✨ This is an AI-generated explanation of the paper below. It is not written or endorsed by the authors. For technical accuracy, refer to the original paper. Read full disclaimer

In the world of modern medicine, the path from a scientist's laboratory to a patient's medicine cabinet is paved with immense financial risk. Developing a new drug is a long, expensive gamble, requiring billions of dollars and many years of work before a single pill reaches the market. Because of this, pharmaceutical companies rely on the promise of future sales to justify these costs. In many nations, the largest buyer of these medicines is not an individual, but the government, acting as a national health insurance system. This creates a delicate tension: if the government pays too much, the system becomes unaffordable for everyone; if it pays too little, companies may stop inventing new cures because they cannot make a profit. The central question for policymakers is whether a system that demands lower prices can still encourage the creation of life-saving innovations.

A team of researchers at China Pharmaceutical University set out to answer this question by looking at a specific policy known as medical insurance access negotiation. Since 2018, China has established a regular process where government experts sit down with drug companies to negotiate the price of new, high-value medicines. In exchange for a significantly lower price, the government agrees to add these drugs to its national reimbursement list, making them affordable for hundreds of millions of people. The researchers wanted to know if this trade-off, which drastically cuts the price of a drug, actually hurts the companies' ability to fund their next generation of research, or if the guarantee of a massive market helps them invest even more.

To find the answer, the team analyzed data from 335 pharmaceutical manufacturing firms in China over a fourteen-year period, from 2010 to 2024. They focused on a group of 62 companies that had at least one product successfully included in the national negotiation list, comparing their behavior to a larger group of 273 companies that had not yet entered these negotiations. By tracking how much money these companies spent on research and development each year, the researchers could see if the policy acted as a brake or an accelerator for innovation. They carefully controlled for other factors that might influence spending, such as the size of the company, its debt levels, and how profitable it was, to ensure that any changes they saw were truly caused by the negotiation policy and not by general economic trends.

The results were clear and statistically strong. The study found that when a company's drug was included in the national negotiation, its investment in research and development increased significantly. The data showed that the policy did not suppress innovation as some critics feared; instead, it stimulated it. Companies that secured a spot on the reimbursement list, even with lower prices, poured more money into their labs than their counterparts who remained outside the system. This effect held true even after the researchers tested their methods in different ways, including running simulations to rule out the possibility that random chance or hidden factors were driving the results. The consistency of the data across different models gave the researchers high confidence that the policy was the direct cause of the increased spending.

The researchers explain this outcome through a concept known as the volume-for-price scale effect. When the government negotiates a lower price, it simultaneously guarantees access to a vast market of patients who can now afford the medicine. This surge in sales volume generates enough total revenue to offset the lower price per unit. The stable cash flow from these sales allows companies to feel secure enough to reinvest in high-risk, high-reward projects. Rather than cutting back, the companies use the certainty of a large market to fund the next wave of scientific discovery. The study suggests that the policy successfully balances two competing goals: it keeps drug prices low enough for the public to afford them while providing the financial stability companies need to keep inventing.

This finding offers a concrete example of how a single-payer system can work in a large, middle-income country. By analyzing the real-world behavior of hundreds of firms, the study provides evidence that strategic purchasing does not have to come at the cost of scientific progress. The data indicates that the tension between controlling costs and encouraging innovation can be resolved, provided the system is designed to trade lower prices for guaranteed market access. For other nations facing similar challenges in balancing healthcare budgets with the need for new treatments, the Chinese experience offers a replicable path forward, showing that a government can be a tough negotiator on price without becoming a barrier to the future of medicine.

Technical Summary: Impact of National Medical Insurance Purchases for Innovative Drugs on Pharmaceutical Firm R&D Investment

Problem Statement
The study addresses a critical tension in pharmaceutical policy: the trade-off between controlling drug prices to ensure patient affordability and maintaining sufficient profit margins to incentivize corporate Research and Development (R&D). While China's National Healthcare Security Administration (NHSA) has established a regularized mechanism for medical insurance access negotiations to secure lower prices through strategic purchasing, it remains unclear whether the resulting price reductions (averaging around 60%) undermine the financial capacity of firms to sustain innovation. Existing literature presents conflicting views, suggesting that insurance purchasing could either stimulate R&D through expanded market volume and cash flow (Incentive Effect) or suppress it by compressing profit margins and crowding out high-risk innovation (Inhibitory Effect). This paper seeks to empirically determine the net effect of China's specific negotiation policy on pharmaceutical R&D investment within a middle-income context.

Methodology
The research employs a quasi-natural experiment design using a Multi-period Difference-in-Differences (DID) model.

Data: The study utilizes a panel dataset of 335 Chinese pharmaceutical manufacturing firms spanning from 2010 to 2024. Data sources include the China Stock Market & Accounting Research (CSMAR) database and corporate annual reports, totaling 2,911 observations.
Sample Construction: The treatment group consists of 62 firms that had at least one product successfully included in national medical insurance negotiations (starting from 2018). The control group comprises 273 firms that did not participate in these negotiations during the study period.
Model Specification: The baseline regression model is defined as:
$Y_{it} = \beta_0 + \beta_1(DID_{it}) + \gamma X_{it} + \alpha_i + \delta_t + \varepsilon_{it}$
Where $Y_{it}$ is the R&D expenditure (dependent variable), $DID_{it}$ is the interaction term between the treatment group dummy and the post-policy period dummy, and $X_{it}$ represents control variables (firm size, leverage, return on assets, and total asset turnover). Firm and year fixed effects ( $\alpha_i, \delta_t$ ) are included to control for unobserved heterogeneity.
Robustness Checks: To ensure validity, the study conducted:
1. Parallel Trend Tests: Confirming no significant pre-policy differences between treatment and control groups.
2. Alternative Model Specifications: Re-estimating using a multi-period DID approach ( $DID_{period}$ ) to account for staggered policy implementation times, as opposed to a uniform 2018 shock ( $DID_{fixed}$ ).
3. Placebo Tests: Conducting 500 random sampling simulations to rule out the influence of unobservable random factors.

Key Results

Primary Finding: The baseline regression results indicate a statistically significant positive impact of the medical insurance negotiation policy on firm R&D investment. The coefficient for the core explanatory variable ( $DID_{fixed}$ ) is positive and significant at the 1% level. After introducing control variables, the coefficient stabilizes in the range of 4.07 to 4.10, suggesting that firms with products included in the national reimbursement list increased their R&D investment intensity compared to the control group.
Control Variables: Firm size ( $LN\_size$ ) showed a significant positive correlation with R&D investment. However, leverage ratio ( $LEV$ ), return on assets ( $ROA$ ), and total asset turnover ( $TAT$ ) did not exhibit statistically significant influences on R&D decisions in this model.
Robustness: The positive effect persisted across all robustness checks. The multi-period DID model yielded a stable coefficient around 3.50, and placebo tests confirmed that the observed effects were not driven by random noise, as the true coefficient lay far outside the distribution of simulated placebo coefficients.

Key Contributions

Empirical Evidence: The study provides robust empirical evidence that, contrary to concerns about price suppression, China's medical insurance access negotiation policy has effectively incentivized corporate R&D investment.
Mechanism Validation: It validates the "volume-for-price" scale effect in a middle-income country context, demonstrating that the expanded market access and stable cash flow generated by insurance inclusion can offset the financial pressure of price reductions.
Policy Nuance: By utilizing a multi-period DID approach, the study accurately captures the dynamic effects of staggered policy implementation, offering a more precise estimation than models assuming a uniform shock.

Significance and Claims
The paper claims that the Chinese medical insurance access negotiation policy achieves a dynamic balance between cost containment and innovation incentives. It posits that the policy operates through strategic purchasing, where the government secures lower prices in exchange for expanded market volume, creating a "win-win" scenario: patients gain financial relief, and firms secure the sales volume necessary to fund further innovation.

The authors assert that this experience offers a replicable "middle path" for global health system reform, particularly for other middle-income countries struggling to balance rising healthcare costs with the need to sustain pharmaceutical innovation. The study concludes that the policy shock does not suppress innovation but rather provides a positive incentive, suggesting that the current negotiation mechanism should be upheld and optimized.

Limitations
The authors modestly acknowledge that the study primarily verifies the net effect of the policy on R&D investment without explicitly testing the specific transmission pathways (mediating variables) such as corporate cash flow, market expectations, or R&D pipeline adjustments. They suggest future research should focus on constructing mediating effect models to elucidate the "price-volume-profit-R&D" chain and investigate heterogeneous effects across different firm sizes and innovation types.

Technical Summary: Impact of National Medical Insurance Purchases for Innovative Drugs on Pharmaceutical Firm R&D Investment

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