During the planned economy, free medical services were provided to everyone in China. Public health facilities heavily relied on government subsidies and the government set a price which was far below real costs. Medicines mark-up by public health facilities was first allowed in 1954, when the Chinese economy experienced the most difficult times. Such a policy gradually evolved into a perverse incentive along with the economic reform starting from 1978, when public health facilities were encouraged to generate revenues and were allowed to issue bonuses. In turn, the income of individual staff was directly linked with revenue generation. The unchanged low level medical service fee forced providers to generate more revenue from mark-up of medicines. This contributed to unnecessary prescriptions written by doctors. Doctors preferred expensive medicines and poly-pharmacy, which contributed to increased medical cost and public out of pocket expenditure.

Beijing implemented the “medicines zero mark-up policy” in community health centers (CHCs) in 2007. The aims of the policy were to eradicate the afore-mentioned incentives, contain the medicines cost, and reduce the financial burden to the public. Policy-makers selected 312 medicines based on the national essential medicines list. The CHCs were required to procure these medicines via government pooled tendering...