What China’s Crackdown on Corruption Means for Foreign Healthcare Companies

In mid-May, Chinese officials charged Mark Reilly, the former head of GlaxoSmithKline’s China busines, with graft. He is accused of systematically bribing doctors and other hospital staff to boost the company’s drug sales. If convicted, he could face between three years imprisonment and life. GSK is said to have spend up to $492 million for kickbacks between 2007 and 2013.

But Reilly isn’t the only one who is in trouble. According to Reuters, after the accusations became public last July, GSK's revenues in China fell by 61 percent in the third quarter of 2013 and were 20 percent lower in the first quarter of 2014 compared to 2013. Last week, Britain's fraud office started a criminal investigation against the company, reportedly connected to the corruption accusations in China (and elsewhere).

Not an isolated case

Numerous reports suggest that GSK isn’t an isolated case and that corruption is widespread in China’s healthcare sector. The former hospital ultrasound chief Lan Yuefeng stirred up some controversy when she publicly spoke up against corrupt practices like implanting pacemakers without medical necessity. “Many doctors act in this (corrupt) way. I think it's pretty common, and I think it's really sad," she told Agence France Press. According to the article, doctors in the state system are underpaid which creates a fertile breeding ground for corruption. "Putting aside ethics is necessary to make a living," Lan said to the news agency.

New laws targeting corruption

As a reaction to public discontent, two laws passed last December in China that aimed to fight corruption in the healthcare sector. Circular 49 targets hospitals and doctors and prohibits, among other things, to link staff income to treatment related sales, and to accept commissions, donations or subsidies from suppliers. Physicians violating the rule risk criminal prosecution and losing their license.

Circular 50 came into force in March and aims at the suppliers of medical products and drugs. According to the law firm WilmerHale, the main consequence of the law is that companies that are charged or even only investigated for bribery will be blacklisted. Public hospitals, which account for 90 percent of Chinese clinics, are prohibited to deal with companies that are blacklisted in their province. A manufacturer that appears twice on a black list within five years will be barred nationwide for two years. In order to enforce these rules, Chinese officials have started to conduct unannounced inspections at healthcare companies, according to the Reuters report.
The attempt to crack down on corrupt practices is likely to increase the costs of doing business in China significantly for medtech companies. They don’t only have to make sure that their staff is playing by the rules but also have to implement measures to control local outside sales agents acting on behalf of the company.