OBJECTIVES: This study provides empirical evidence regarding the price dynamics and market penetration of new drugs in a single public payer health care system that regulates prices of prescription drugs. METHODS: The main data source was the 3 million sampling cohort claims data compiled by the National Health Insurance Research Database (NHIRD) from 1997-2012 in Taiwan. We defined new drugs as those added to the National Health Insurance formulary after 1996, and traced the price and utilization of drugs with new molecules, formulations, combinations, and indications launched in Taiwan’s NHI drug formulary during 1997-2006 for up to 6 years. RESULTS: Our results indicate that therapeutic innovation is positively associated with the price ratios of current price (CPI-deflated) versus the launch prices. The increase in therapeutic competition at the 4th level ATC market slightly decreases the price ratio. With respect to market shares, because of the fairly low launch prices, there is no price effect. The market penetration of new drugs does not depend on whether the product contains a new molecule. Biologics have a disadvantageous position to compete with other new drugs. The therapeutic competition at the 4th level ATC market leads to substitution among drugs with similar therapeutic value. The elasticity of market share of large-scale providers with respect to market share of new drugs was around 3.00, and that for the market share of private providers was around 0.84. CONCLUSIONS: This study suggests that the penetration of new drugs largely depends on the concentration of large-scale providers in a single public payer system that regulates prescription drug prices. Whether new drugs are adopted by large-scale medical providers is critical in determining access to new drugs. The government agency may need to consider this spillover effect on the prescription drug market when shaping health care policies for medical providers.