Expected Insurance Coverage and Pharmaceutical Innovation: Evidence from China’s National Drug Price Negotiation Policy

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, enlarging the effective market size. We examine its impact on innovation using a difference-in-differences design that compares clinical trials of new drugs (treated) with those of vaccines (unaffected). The policy increases the number of trials by 0.56 per disease per year. The effects are especially pronounced for more novel innovations and similar for domestic and foreign firms. We also find that the policy induces more R&D pharmaceutical firms, especially those of small size, to enter the market. Finally, we document increased collaboration and outsourcing across firms.