OBJECTIVES: This study estimates the effect of national essential drug system on drug price and patient selection of pilot grass-root medical institution. METHODS: This study employs DID (difference-in-difference) method to investigate the effect of Essential Drug Regime Reform (EDRR) on drug price and patient selection of public grass-root medical institutions. Our sample comes from a Chinese city’s Urban Employee Basic Medical Insurance Reimbursement Dataset for inpatient care from 2009-2010.The full sample has 53416 observations including 2896 unique pharmaceutical firm-level products from 210 grass-root medical institutions. The dependent variable is the average price of each product in each month from each medical institution. The key independent variables are dummy variables indicating the pilot institutions (TREAT), the releasing time of Essential Drug Regime (EDR) and interaction of them(TREAT*EDR). RESULTS: The results show that after the implementation of EDR, drug price on the pilot institutions decreased significantly by 37 percent (relative to control institution).Especially, essential drugs fell by 43.3 percent relative to control institution. This policy has no significant effect on non-essential drugs. After the implementation of the national essential drug system inpatient expenditures of the pilot medical institutions increased by 20.67%, length of stays increased by about three days, relative to the non-pilot medical institutions. After all , there is no change in patient co-payment rate. We found that patients more severe (diagnosed with more than one diseases) chose to go to the pilot medical institution increased by 7% . CONCLUSIONS: The national essential drug systerm has signifcant effect on durg price,especially the essential drug, and the patients more severe prefered to go to the grass-root medical institution rather than levle-2 and level-3 hospitals.