SMU SOE Seminar Series (August 27, 2025): Insurance Coverage and Pharmaceutical Innovation: Evidence from China’s National Drug Price Negotiation Policy

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ABSTRACT

How can developing countries foster pharmaceutical innovation when drug price negotiations risk eroding firms’ incentives? China’s National Health Insurance Drug Price Negotiation addresses this challenge by pairing substantial price cuts with expanded insurance coverage for innovative drugs, thereby enlarging the effective market size. We examine its impact on pharmaceutical innovation using a difference-in-differences design comparing clinical trials for new drugs (treated) to those for vaccines (untreated). The policy increases the probability of any clinical trial by 4% and the number of trials by 0.4 per disease per year. The effects are especially pronounced for more novel innovations and are larger for firms after their drugs have been successfully negotiated into coverage.

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