Does China's national volume-based drug procurement policy promote or hinder pharmaceutical innovation?

The national volume-based drug procurement policy initiated in China since 2018 represents a significant reform in China's pharmaceutical distribution system. It has largely squeezed out the price bubble of low-end generic drugs, making competition in the pharmaceutical sales segment more intense and transparent. This policy intervenes in the distribution link of the pharmaceutical industry by intensifying market competition, thereby enhancing the innovation willingness and R&D capabilities of pharmaceutical companies.

Taking the national volume-based drug procurement policy as the policy shock, we used the multi-period difference-in-difference method to study the impact of the policy on innovation input, innovation output quantity and innovation output quality of listed pharmaceutical companies and its impact mechanism.

We found that the volume-based policy can significantly promote the pharmaceutical companies' innovation input and the innovation output quality, but significantly reduced the innovation output quantity. For innovative and generic drug companies, this policy has limited impact on innovative drug companies, but force generic drug companies to pay more attention to cost control and market positioning, and the quality and cost-effectiveness of R&D output to ensure competitiveness in the market. For bid-winning and non-winning companies, the policy has a greater innovation incentive for non-winning companies than winning companies, by imposing greater survival pressure on non-winning companies, forcing them to increase R&D investment intensity and adopt the innovation strategy of preferring quality to quantity.

The results show that the national volume-based drug procurement policy should be expanded to lower drug prices and lighten the medical burden on patients, with enhanced quality and safety supervision. Additionally, it suggests cautious application of such policies to innovative and high-end generic drugs to encourage continued pharmaceutical innovation and industry advancement.