Legislative Reform of China’s Healthcare Sector Targets Corruption: Implications for Multinational Companies
August 28, 2014
BY GARY GIAMPETRUZZI, ANANDA MARTIN, HAIYAN TANG & BAKER CHEN
In recent years, eliminating corruption in the healthcare industry has been a major focus of U.S. regulators. Since 2003, the U.S. Securities and Exchange Commission (“SEC”) and Department of Justice (“DOJ”) have brought over 30 enforcement actions against medical device and pharmaceutical companies under the U.S. Foreign Corrupt Practices Act (“FCPA”).
I. CIRCULARS 50 AND 163: A BIGGER, BADDER BLACKLIST
Effective March 1, 2014, Circular 50 updates existing rules for blacklisting healthcare companies engaged in bribery of state healthcare institutions and medical personnel, which had been in effect since January 2007,
In short, Circular 50 now raises the possibility that companies and their employees will be blacklisted simply because they become the target of a bribery investigation, even in cases where they are found not guilty in court or a prosecutor fails to press charges.
Circular 50 also provides the following enhancements to existing blacklisting regulations:
New pre-blacklisting administrative procedures to contest regulatory decisions;
Additional requirements for purchase and distribution agreements between hospitals and healthcare companies, including disclosure of the identity of the relevant sales representative and inclusion of anti-commercial bribery provisions;
Clarifications regarding the geographic scope and duration of sanctions. For public hospitals and other state-funded medical institutions, in addition to the existing prohibition against purchasing goods from blacklisted companies for two years in the province where the bribery occurred， the new regulations impose a penalty in the form of a deduction of points when competing for government contracts in other provinces. If a company is blacklisted two or more times within a five-year period, the violator will be prohibited from selling its products to any public or publicly-funded medical institution nationwide;and
Obligations for healthcare institutions and lower-level healthcare authorities to report improper payments.
Supplementing Circular 50, Circular 163, which came into effect on February 26, 2014, provides additional guidance on blacklisting procedures, establishing an aggressive timeline for the reporting, investigation and debarring of violators in as few as 25 working days.
Kickbacks “in any name or form”;
Donations and sponsorships linked to procurement decisions;
Entertainment in any commercial entertainment establishment; and
Cash, securities and other valuable gifts.
II. CIRCULAR 49: THE "NINE PROHIBITIONS"
While Circulars 50 and 163 focus on the supply-side of bribery in the healthcare sector, Circular 49, effective December 26, 2013, targets the recipients of potential improper payments: Chinese hospitals and medical personnel. Through its “nine prohibitions,” Circular 49 seeks to prevent hospitals and healthcare professionals from engaging in the following commercial activities:
1. Linking physicians’ income to revenue generated from the sale of drugs or provision of healthcare services;
2. Paying commissions to physicians based on the value of drugs prescribed and health services rendered;
3. Charging additional fees or raising fee standards beyond the permitted national price cap for drugs or healthcare services;
4. Accepting improper donations from healthcare companies;
5. Participating in promotional activities or issuing illegal advertisements;
6. Compiling medical statistical data for commercial purposes;
7. The procurement, sale, and use of medical products through private channels;
8. Accepting commissions or kick-backs in any form or attending activities held in commercial entertainment venues that are organized or sponsored by healthcare companies; and
9. Accepting cash or valuable gifts from patients or their families.
As the National Health and Family Planning Commission (“NHFPC”) has yet to issue implementing regulations for Circular 49, many key terms remain open to interpretation. For example, it is unclear whether the prohibition under Article 4 against accepting “improper donations from healthcare companies” would extend to a healthcare professional’s receipt of a corporate sponsorship to attend a bona fide medical education program, or even the provision of an educational grant to a third party under certain circumstances.
III. IMPLEMENTATION: THE BLACK BOX OF ENFORCEMENT
The issuance of Circulars 50 and 163 is a strong indication of the Chinese government’s determination to curb the supply of corrupt payments to healthcare professionals at the national level. However, how the rules will be enforced remains to be seen. While developments in high-profile anti-bribery investigations into both domestic and international healthcare companies are widely reported in the Chinese media, to date, the NHFPC has not published the name of any company sanctioned under the revised system. This will likely be a matter of time as the central government builds the infrastructure to support the national blacklist database. In the meantime, databases established by provincial authorities under the existing blacklisting system provide examples of the application of blacklisting procedures under the 2007 rules.
On the demand side, 2014 has seen a notable increase in rhetoric aimed at public hospitals and medical institutions suspected of corrupt activities. For example, China’s Supreme People’s Procuratorate (“SPP”), the government body charged with investigating and prosecuting criminal bribery charges, recently announced that it will continue to focus on investigating bribery cases that “jeopardize the livelihood of citizens,” including cases involving healthcare issues.
IV. IMPLICATIONS FOR MULTINATIONAL HEALTHCARE COMPANIES
China is by no means alone in employing blacklisting as an anti-corruption enforcement tool. Under U.S. Federal Acquisition Regulations governing federal procurement, corporate or individual violators of the FCPA
Critically, under U.S. blacklisting rules, healthcare companies that are cleared of wrongdoing by the relevant court or administrative body are free to continue contracting with the U.S. government. In China, however, becoming embroiled in an anti-bribery investigation, even one that does not result in the issuance of charges, or that ends with a victory in court, may for all practical purposes mean the end of market access.
In the last decade, U.S. enforcement agencies’ “industry sweep” of the healthcare sector has spurred multinational healthcare companies operating in China to review and revamp their compliance programs from an FCPA perspective. As the grounds for blacklisting healthcare companies found guilty or suspected of commercial bribery violations in China have expanded and as Chinese regulators’ attention has shifted to the supply side of the bribery equation, multinationals operating in this market should ensure that their internal compliance policies and practices reflect not only the latest U.S. standards, but also changes to local rules and regulations. In particular, multinationals need to ensure that they have in place policies and procedures that are reasonably designed to ensure compliance with domestic laws such as Circulars 50 and 163 and mitigate the risk of the provision of kickbacks “in any name or form” – such as donations and sponsorships linked to procurement decisions. Indeed, all pharmaceutical and medical device companies operating in China should review their sales marketing and promotional activities to confirm that, even if FCPA-compliant, they do not conflict with increasingly important local laws. The impact of these blacklisting and debarment provisions will not be fully understood until they are widely applied, as they have been in the United States. However, in the meantime, healthcare companies operating in this critical market should take note of their potentially wide-reaching impact, and undertake a proactive review of their compliance operations while the horizon is clear, rather than after the cloud of enforcement is upon them.
Paul Hastings LLP is a global law firm with offices in Asia, Europe and the United States. Paul Hastings has one of the largest, full-service, multi-jurisdictional legal practices in Asia with legal professionals in Beijing, Hong Kong, Seoul, Shanghai and Tokyo.
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While the companies whose names were posted under the old blacklisting rules appear mainly to be domestic enterprises (i.e., unaffiliated with multinational companies), foreign companies or their Chinese subsidiaries have also been listed. For example, CHIC Medical Instrument Co., LTD. Fuzhou Branch (上海熙可医疗器械有限公司福州分公司) was blacklisted by the Fujian Provincial Health Department in 2008. See,９家医药公司被列入商业贿赂不良记录黑名__单 (Nine Pharmaceutical Companies Entered into Poor Record Commercial Bribery Blacklist), Xinhua Net (April 14, 2008), available at
Paul Hastings LLP is licensed in the People’s Republic of China as a foreign law firm permitted to advise clients on certain aspects of their international transactions and operations. Like all foreign law firms operating in China, we are not authorized to practice Chinese law. You are hereby advised that this document was prepared by us and is based on our experience in advising clients on international business transactions and operations and on research and inquiries we deemed appropriate, and is not intended to be used (and cannot be used) as an opinion on the laws of China. To the extent you require such an opinion or the assistance of a qualified China lawyer, we would be pleased to assist you to identify an appropriate domestic China law firm. The author of this document does not hold a lawyer’s license in the People’s Republic of China. Paul Hastings is a limited liability partnership. Copyright © 2014 Paul Hastings LLP.