At the end of 1998, China launched a government‐run mandatory insurance program, the urban employee basic medical insurance (UEBMI), to replace the previous medical insurance system. Using the UEBMI reform in China as a natural experiment, this study identifies variations in patient cost sharing that were imposed by the UEBMI reform and examines their effects on the demand for healthcare services. Using data from the 1991–2006 waves of the China Health and Nutrition Survey, we find that increased cost sharing is associated with decreased outpatient medical care utilization and expenditures but not with decreased inpatient care utilization and expenditures. Patients from low‐income and middle‐income households or with less severe medical conditions are more sensitive to prices. We observe little impact on patient's health, as measured by self‐reported health status. Copyright © 2015 John Wiley & Sons, Ltd.