From Drug Margins to Service Value: A Nationwide Longitudinal Analysis of Structural Financial Reform in Chinese Public Hospitals and Its Consequences

Introduction For decades, a "drug markup" policy enabled Chinese public hospitals to subsidize operations by allowing 15% profit for pharmaceuticals. This created perverse incentives for overprescribing, which contributed to cost inflation and antimicrobial resistance. China's 2009 healthcare reform included the elimination of this markup, the zero-markup drug policy (ZMDP), along with increased fees for medical services and government subsidies. This paper focuses on the structural financial evolution of Chinese public hospitals before and after the ZMDP and evaluates the impact of the reform on revenue structure, cost control, and operational efficiency. Methods We conducted a retrospective longitudinal study using national panel data from 2010–2021. Data were extracted from the China Health Statistics Yearbook, China Statistical Yearbook, and National Health Commission reports. Using a two-way fixed effects panel regression model, we evaluated the impact of the ZMDP on revenue structure while controlling for GDP per capita, urbanization, and bed density. An interrupted time series analysis (ITSA) was conducted to assess the impact of the policy on outpatient and inpatient costs. Analyses were conducted via Stata 17.0 and R 4.2.1. Results ZMDP implementation was associated with a significant decrease in the proportion of drug revenue in total hospital income, from an average of 43.7% (pre-2015) to 28.4% (post-2017) (p < 0.001). This was offset by a marked increase in revenue from medical services (e.g., diagnosis, surgery, treatment), which rose from 36.2% to 49.1% of total income. Government subsidies increased modestly from 8.9% to 12.5%. Crucially, the ITSA revealed a significant slowdown in the rate of growth of average outpatient and inpatient costs post reform. Conclusion China's reform has successfully initiated a structural shift from drug-driven to service-driven hospital financing. However, the transition remains precarious. The emergent reliance on volume-driven service revenue and regional disparities in subsidy allocation risk new distortions. Future policy must strengthen fiscal transfers, accelerate value-based payment models such as DRG/DIP, and decouple physician remuneration from departmental revenue to fully realize the reform's goals.