# Pharmaceutical expenditure changes under the volume-based procurement policy: Effects and influencing factors

## TL;DR

China's volume-based procurement policy significantly reduced drug expenditures for covered drugs but increased spending on alternatives, with manufacturer changes and price drops being key factors.

## Contribution

The study quantifies the impact of China's VBP policy on drug expenditures and identifies the factors driving these changes using a DID model and index decomposition.

## Key findings

- VBP drug expenditures decreased by 42.19%, driven by manufacturer structure and price index declines.
- Alternative drug expenditures increased by 11.52% due to rising quantity index.
- Expenditure reductions were strongest in tertiary hospitals compared to lower-level facilities.

## Abstract

To estimate the impact of China’s volume-based procurement (VBP) policy on the expenditure of both policy-covered and uncovered drugs, and to identify the elements that contribute to drug expenditure changes under VBP policy.

Using national drug procurement data of public medical institutions, this study included 25 policy-covered VBP drugs and 99 policy-uncovered alternative drugs as samples, seven “4+7” pilot cities and eight “4+7” expansion provinces as observation regions. Time-varying difference-in-difference (DID) model was applied to quantify policy impact on drug expenditures. The drug expenditure index decomposition method was employed to analyze the determinants of drug expenditure changes following VBP policy.

The expenditure of VBP drugs significantly decreased by 42.19% after VBP policy (β = −0.55, p < 0.001), while alternative drugs increased by 11.52% (β = −0.11, p < 0.001), with a significant reduction in the overall expenditure of observed drugs (β = −0.05, p < 0.001). The decrease of VBP drug expenditures showed a trend of tertiary hospital (β = −0.64, p < 0.001) > secondary hospital (β = −0.57, p < 0.001) > primary healthcare centers (β = −0.39, p < 0.001). The index decomposition showed that manufacturer structure index (IM) decline was the primary driver for expenditure reduction of policy-covered drugs, with the IM decrease of 54.17% in pilot cities and 40.86% in expansion regions. The secondary driver was the price index (IP), with a decline of 31.68% in pilot cities and 36.08% in expansion regions. The restraining factor was the quantity index (IQ), increasing by 92.54% in pilot cities and 52.04% in expansion regions. IQ also drove the increase in alternative drug expenditures, increasing by 95.56% in pilot cities and 32.76% in expansion regions.

VBP policy effectively promoted the decline of total drug expenditures, primarily through manufacturer-level market displacement and the absolute price reduction. However, the “spillover effect” of alternative drugs weakened the overall effect on cost control. Strengthening holistic governance and improving the quality and intensiveness of drug use are important directions for future policy perfection.