Background <p>A pillar of Healthy China 2030, the health industry is key to economic progress, public well-being, high-quality growth, health protection and regional economic transformation in China. To balance growth and sustainability, China launched a pivotal 2017 environmental policy in the Yangtze River Economic Belt (YREB) to tighten ecological constraints and protect the Yangtze River basin. This raised critical questions for the region’s health industry since the effect on the health industry is less explored. This study aims to evaluate how the 2017 YREB environmental policy shaped the sector’s development.</p> Methods <p>Employing a set of econometric analysis methods including two-way fixed effects difference-in-differences (TWFEDID), propensity score matching (PSM), and doubly robust difference-in-differences (DRDID), it assesses how these regulations influence the health sector, focusing on how businesses emerge or fold.</p> Results <p>The findings of this study reveal that environmental mandates have diluted the dominance and density of the pharmaceutical sector in the health industry. This is primarily due to an influx of non-pharmaceutical ventures and a surge in entrepreneurial vigor rather than a direct drawback on pharmaceutical entities. The minimal negative repercussions on pharmaceutical firms highlight an “innovation compensation effect”, suggesting that innovative responses within this sector might counterbalance regulatory pressures.</p> Conclusions <p>This insight underscores the interplay between regulatory environments and sectoral innovation, advocating for a balanced approach in policy formulation that fosters both industrial growth and environmental stewardship.</p>