Picture: REUTERS
Picture: REUTERS

SINCE the 1980s, China has modernised its hospitals, added a decade to life expectancy, halved infant mortality and eliminated diseases such as polio.

Now companies are getting nervous as Beijing trains its sights on endemic medical corruption. Efforts to clean up the country’s $350bn healthcare industry have gained prominence since police said last month they were investigating GlaxoSmithKline for suspected economic crimes.

Yesterday, the China Food and Drug Administration said it would "severely crack down" on fake medications, forged documents and bribery.

Six years after executing its chief drug regulator for accepting bribes for approving fake medicines, the government is focusing on ensuring an eight-fold increase in health spending over the past decade does not also line the pockets of pharmaceutical manufacturers, doctors and hospital officials.

"We know that China’s corruption is so entrenched in the pharmaceutical space that in order to get things done you have to bribe officials; it’s an open secret," says Yanzhong Huang, senior fellow for global health at the Council on Foreign Relations in New York and author of the book Governing Health in Contemporary China. "Rampant bribes, commissions and corruption raises drug prices. This makes it difficult for public hospital reform to push forward."

China’s drugs regulator will conduct a crackdown from this month to December, Yan Jiangying, a spokeswoman for the agency, told reporters at a briefing in Beijing yesterday.

Recent investigations have so far implicated Glaxo, the UK’s largest drug maker, though other foreign companies may also be involved, Gao Feng, head of the economic crimes investigations unit of the public security ministry, told reporters. Eli Lilly agreed in December to pay $29.4m to settle US Securities and Exchange Commission allegations that employees gave cash and gifts to officials in China, Brazil, Russia and Poland to win millions of dollars in business.

Pfizer, the world’s biggest drug maker, agreed last August to pay $60.2m to settle foreign bribery cases it disclosed to US authorities involving alleged payments paid by employees and agents of subsidiaries.

China’s police will seek co-operation with law enforcement agencies overseas in an international effort to root out corruption in the healthcare industry, Mr Gao said.

"It’s a crackdown that positions corruption as a problem for which foreign companies are at least equally responsible," says Erik Gordon, of the University of Michigan’s law school.

Eliminating corruption will improve efficiency in a health system that has extended life expectancy by seven years since 1990 to within three years of the US and Denmark, yet remains marred by bribery and counterfeit medicines.

It was time to put bribery in the medical system "to the knife", the Chinese Communist Party said in a commentary yesterday in the People’s Daily, its official newspaper.

The focus on corruption coincides with the government’s objective to improve access to healthcare, lower drug prices and improve public hospitals, said Mr Huang at the Council on Foreign Relations.

China’s top economic planning agency is investigating the costs and prices of drug makers including Glaxo, Merck, Novartis and Baxter International to improve the pricing system for medicines. The National Development and Reform Commission will examine 27 companies for costs and 33 for pricing.

Bribery is one of the main reasons why drug prices are at a "falsely high level in China", the public security ministry’s Mr Feng said, adding that Glaxo’s marketing strategy aids and abets bribery activities.

Steve Nechelput, Glaxo’s finance chief in China, cannot leave the country, company spokesman Simon Steel said yesterday. Mr Nechelput has not been questioned or arrested and was not being detained, he said.

Four of the drug maker’s senior executives were detained amid an investigation involving 3-billion yuan ($489m) of spurious travel and meeting expenses, and trade in sexual favours, Mr Gao said. The allegations are "shameful" and would be a breach of internal systems and values, the London-based company said in response.

China’s interest in Glaxo was stoked by a $3bn settlement with US justice department a year ago concerning a failure to report certain safety data and promotion of two popular drugs for uses that the US regulator had not approved, Mr Gao said. "We were most shocked," he said.

State broadcaster China Central Television (CCTV) aired a prime-time segment yesterday detailing how executives at the UK drug maker used a travel agency to funnel bribes to government officials.

The CCTV report featured Liang Hong, operations manager for Glaxo China, explaining how executives passed bribes to drug regulators, pricing officials at the National Development and Reform Commission and hospital officials. Mr Liang is among the four Glaxo executives in custody, CCTV reported.

"The talk about being appalled at the drug company practices in the US is an attempt to show that America is no better than China," the University of Michigan’s Prof Gordon says. "China genuinely wants to crack down on corruption, but they don’t want to lose face over it."

In the past, China has mostly avoided aggravating foreign companies, said Mr Huang.

China may be using the Glaxo case, which "represents the tip of the iceberg", to send a signal to other drug makers that "it’s time to stop these types of practices", he said.

"I need to remind foreign pharmaceutical companies that, because they occupy a leading position in the industry and reap huge amounts of commercial profits, they should also bear a great responsibility to society and the public," the public security ministry’s Mr Gao said this week. "While we don’t expect them to set a moral example, we expect them to obey the law."

The Glaxo case signals that Chinese authorities may be starting to enforce their anti-corruption laws more aggressively, says Rob Morris, who heads the Asia financial advisory services practice for business consultancy AlixPartners.

China has been taking action against corrupt health officials for years. The former chief drug regulator, Zheng Xiaoyu, was executed in 2007 for taking bribes amid a clamp down on fake medicine.

A former deputy director of the same agency was fired for serious violations of discipline and law in 2011, the same year a Shanghai court handed a suspended death sentence to a former CE of Shanghai Pharmaceutical Group for corruption that enabled him to amass more than 50-million yuan.

Nine heads or senior executives of 13 hospitals were investigated for graft in the southern city of Shenzhen as part of a campaign targeting spurious purchases of equipment, drugs and consumables, Xinhua News Agency reported last month.

"Over the last year and a half we’ve seen a fair bit of activity in terms of a crackdown across the healthcare space in China — for example doctors, lab directors, distributors," said Kelly Austin, partner-in-charge of law firm Gibson, Dunn & Crutcher’s Hong Kong office, whose legal practice focuses on government investigations and regulatory compliance. "It’s not just targeted at multinational corporations."

Low, standardised salaries for doctors and nurses — who are mostly public servants in China — have prompted them to bolster their income by prescribing unnecessary medicine and surgery, where they can take a cut of the money, says Liao Ran, Berlin-based senior programme co-ordinator for East Asia at Transparency International.

They also receive "donations" in the form of red packets, known as hongbao in Chinese, from patients, as well as kickbacks from drug companies.

"Corruption issues in the healthcare sector aren’t just about corruption — it’s the entire system’s structure that will make this a battle for a long time to come," says Mr Liao, who was born in China. "Because corruption has driven up costs, in China, there’s a saying that you cannot afford to be born, you cannot afford to be sick and you cannot afford to be dead."

The effects of the healthcare system structure extend beyond the ailing. The Chinese government’s campaign to spur domestic spending for economic development is also affected by unpredictable healthcare costs, says Mr Liao. "It’s a huge worry. If you have an extra 10,000 yuan, you won’t dare spend it on travel or leisure — you’ll put it away in case mom or dad get sick next year," he says.

Bloomberg