OBJECTIVES: With the roll-out of public hospital reform in China, several provinces have started to implement the zero markup pilots in both municipal- and county-levels. As the pioneer, Zhejiang is the first pilot province that has zero markup policy fully implemented in all levels. The aim of this study is to investigate the outcomes of Zhejiang zero markup policy and thus to predict effect of the policy on health expenditure. METHODS: Official documents of public hospital reform and relevant reports were revised for the detail of how the loss of hospitals resulted from the removal of markup was subsidized. Statistical comparison on expenses variety and physician behavior between Zhejiang and other cases in China was used. RESULTS: Documents released by Zhejiang Government indicated the removal of drug markup should be subsidized through increasing service charge and governmental financial support. After 6 months of implementation, it was reported that drug expenditure in sample hospitals had decreased by 7.78%, with the percentage of drug expenditure out of total out-patient and in-patient expense reducing by 6.67% and 8.7% respectively. Overall diagnostic income increased by 425.31%, whereas incomes generated by care fee, surgery fee and treatment fee increased by 138.77%, 45.75% and 43.65% respectively. Patients visiting were also observed increased with a decrease in average amount per prescription. CONCLUSIONS: Switch of a significant proportion of health care expenditure from drug expenses to service charge indicated changes in the structure of hospital’s income, through which the value of healthcare labor market was manifested and the non-profit nature of public hospitals was restored. However, hospitals may have incentives to increase the number of services they provide to patients, especially when local governmental subsidy is not in place timely. It is predicted that such circumstance may frequently occur during rolling out the policy as local governments across the country differ in their financial capacity. As a result, the user charge of patient will still account for a significant proportion of total healthcare expenditure.