Centralized Negotiation and Insurance Expansion for Innovative Drugs

Making expensive, innovative drugs affordable and accessible is a pressing global challenge. In this paper, we explore the welfare and equity effects of a recent policy reform in China that coupled centralized drug price negotiation with expanded insurance coverage. Before the reform, innovative drugs were mostly excluded from coverage, leading to high out-of-pocket expenses for consumers. The reform offered insurance coverage for these drugs, together with price reductions negotiated between the government and drug producers. Our design-based analysis shows that successful negotiations were followed by 48% decreases in list prices and 350% increases in utilization. The reform also coincided with increased entry of innovative drugs into the Chinese market. We build a flexible model of demand and supply for cancer drugs to understand the mechanisms driving these results. Our model estimates and counterfactual simulations yield three key insights. First, there’s a notable synergy between insurance expansion and price negotiation. Insurance coverage incentivizes drug produers to engage in negotiations, which reduces costs and increases consumer surplus gains by 77% relative to scenarios where drugs are covered without negotiation. Second, the current coinsurance design tends to favor residents in wealthier provinces, thus benefiting higher-income consumers more. We present the results of alternative coinsurance models with equity targets. Lastly, we consider the impact of decentralized, province-level negotiations on the effectiveness of this policy.