Since economic liberalization in the late 1970s, China’s health care providers have grown heavily reliant on revenue from drugs, which they both prescribe and sell. To curb abuse and to promote the availability, safety, and appropriate use of essential drugs, China introduced its national essential drug list in 2009 and implemented a zero markup policy designed to decouple provider compensation from drug prescription and sales. We collected and analyzed representative data from China’s township health centers and their catchment-area populations both before and after the reform. We found large reductions in drug revenue, as intended by policy makers. However, we also found a doubling of inpatient care that appeared to be driven by supply, instead of demand. Thus, the reform had an important unintended consequence: China’s health care providers have sought new, potentially inappropriate, forms of revenue.