This study examines whether financial pressure induced by price regulation motivates selective equipment investment, whether such investment improves patient-level care processes and through what mechanisms these effects arise.
We combine 95,256 inpatient records with nearly a decade of equipment procurement data and physician staffing records from a tertiary public hospital in western China. Exploiting China's zero drug markup policy as an exogenous financial shock, we estimate difference-in-differences and triple-differences models to identify the effects of financial pressure on equipment investment and patient care.
Financial pressure led to a substantial reallocation of equipment investment toward departments with stronger procedure-based revenue potential. Equipment expansion improved patient care processes by shortening pre-procedure delays, increasing same-day procedural coordination and reducing total episode duration without detectable deterioration in quality outcomes. The gains were concentrated among patients treated by junior physicians, supporting an incentive-alignment mechanism rather than capital-skill complementarity. Equipment type also mattered: flow-enhancing equipment improved upstream patient flow, whereas capacity-expanding therapeutic equipment reduced 30-day readmissions. Although the reform shifted case mix toward more procedure-intensive diagnoses, we find no evidence that clinically severe patients were crowded out.
The study shows that financial pressure reshapes the composition of hospital capacity, not merely its level. It further demonstrates that the operational consequences of equipment investment depend jointly on how technology enters the care pathway and how physicians respond to expanded capacity.
