Effects of price cap regulation on pharmaceutical supply chain under the zero markup drug policy

In 2009, China initiated a zero-markup for drugs (ZMD) policy to prevent profit-oriented behaviors among the healthcare providers and alleviate the financial burden on patients. However, overtreatment still prevails because pharmaceutical producers barrage the doctor-patient relationship with promotional activities. This study considered a pharmaceutical supply chain composed of one pharmaceutical producer and one healthcare provider in the context of the ZMD policy, seeking to derive the optimal decisions of the supply chain by considering three scenarios: (1) no promotional activities or price cap regulation; (2) promotional activities but no price cap regulation; and (3) promotional activities and price cap regulation. By comparing the equilibria of these scenarios, we evaluated the impacts of the producers' promotional activities on supply chain members' decisions, profits, and social welfare, as well as the intervention role played by price cap regulation. Our results indicate that the producers' promotional activities contribute to overtreatment, thereby negatively affecting social welfare and patients with low to moderate financial resources. However, the implementation of price cap regulation can effectively reduce the extent of producers' promotional activities, curb overtreatment, and mitigate the associated harm to social welfare.