HCP Roundtable Anyone? South Korea’s Ministry of Health and Welfare Imposes a $48 Million Fine on Novartis Korea and Suspends Insurance Reimbursement
On April 27, 2017, in what should be an alarming development for multinational pharmaceutical companies, the South Korean Ministry of Health and Welfare (the “MOHW”) announced that it will be imposing a KRW55.1 billion (approximately $48 million) fine on Novartis Korea for paying improper benefits to Health Care Professionals (“HCPs”). In addition to the significant financial penalty, the MOHW will suspend insurance benefits for nine of Novartis Korea’s products pursuant to the National Health Insurance Act.
In its public statements about the Novartis case, the MOHW noted that this administrative measure was required to combat concerns of providing so-called illicit “rebates” (i.e., kickbacks) to HCPs totaling KRW2.59 billion (approximately $2.2 million) between 2011 and 2016. This fine represents the largest civil punishment in South Korea for paying rebates to HCPs in connection with third-party media outlets and journals. In addition, Novartis continues to face criminal charges in connection with the still-pending indictment by the Seoul Western District Prosecutor’s Office (“Prosecutor’s Office”) in August 2016, regarding similar allegations of improper benefits to HCPs.
The South Korean Market: Opportunity and Risk
Based on a 2016 study, South Korea was the 13th largest pharmaceutical market in the world, and the third largest in Asia, trailing only the powerhouse China and Japan markets.
Against that backdrop of great business opportunity, South Korea has implemented significant measures to fight illicit rebates or kickbacks in the pharmaceutical industry over the past decade. For example, in November 2010, a dual punishment system was implemented to stop increases in drug prices by making both the HCPs and pharmaceutical companies liable for punishment in the event of evidence of improper benefits or bribes.
In addition, South Korea recently passed the Improper Solicitation and Graft Act (also known as the Kim-Young-Ran Act) to fight bribery throughout Korean society, prohibiting certain gifts to government officials, professors, and journalists. This law took effect in September 2016. Although the Kim-Young-Ran Act was not specifically targeted at the pharmaceutical industry, it nonetheless reflected the Korean government’s commitment to the elimination of improper payments. In a recent survey, almost 80% of Korean citizens believed that corruption to be a serious problem.
Given this heightened regulatory and enforcement landscape, the Korean government has been actively investigating both domestic and multinational pharmaceutical companies for suspected violations. Starting in 2007, a set of Korean and multinational pharmaceutical companies faced penalties from the initial investigation by the Korea Fair Trade Commission (“KFTC”).
With the April 27, 2017 announcement of the fines levied against it, Novartis Korea has become the first company in the market to be punished under the “rebate two strike-out system.”
More to Come for Novartis: The Criminal Prosecution
Despite the likely civil resolution, Novartis still faces criminal prosecution. On February 22, 2016, the Seoul Western Prosecutor’s Office raided Novartis Korea on allegations that Novartis Korea provided illegal rebates (kickbacks) of KRW2.59 billion (about $2.2 million) to HCPs through media outlets specializing in the pharmaceutical industry. There are specific allegations that excessive payments and entertainment were provided to HCPs who wrote columns and held panel discussions, roundtable meetings (RTMs), or ABMs in favor of Novartis products. It was later reported that an industry newspaper had been investigated in December 2015. On March 25, 2016, another industry newspaper was raided by the Korean Government. In June 2016, the Prosecutor’s Office raided the Korea Research-Based Pharmaceutical Industry Association (KRPIA) to obtain reported records of Novartis Korea. The government also collected the sponsorship records of HCPs’ attendance at overseas congresses of member companies from 2011 to 2016. The records that the prosecutors collected no doubt contain a who’s who among the multinational pharmaceutical community, all of whom are heavily invested in their Korean operations.
The Prosecutor’s Office alleges that Novartis Korea paid advertising fees to media outlets to hold events such as roundtable meetings. The media outlets then paid service fees to HCPs in the form of honoraria or participation fees, fees for writing/translating articles, or consultation fees. The Prosecutor’s Office found that Novartis Korea had authority to select and contact the participating HCPs, provide materials, and determine service fees, while the media outlets played marginal roles. In short, the Prosecutor’s Office alleges that Novartis used the media outlets as conduits for making such payments on behalf of Novartis Korea in order to circumvent the risk of provision of illegal rebates in a more direct manner. To this point, the Prosecutor’s Office indicted 34 individuals and corporate persons, including six Novartis employees, six media outlets, their representatives, and 15 HCPs.
The criminal trial of Novartis Korea and the indicted individuals is ongoing. However, during the most recent hearing in Seoul, a former Novartis employee testified on behalf of the prosecution, admitting in open court that Novartis engaged media outlets to organize events and make payments to HCPs. The prosecutor also announced during that hearing that representatives from two of the media outlets had confessed to their participation in the alleged scheme. Comparable to how these matters proceed in the United States and elsewhere, there is potential that the cooperating media-outlet defendants may admit to any similar schemes with other pharmaceutical companies, not just with Novartis, in order to gain favor with the prosecutors and mitigate their own civil and criminal exposures.
What Comes Next?
For those who have been watching the Prosecutor’s Office over the years, it is reasonable to expect the Novartis case to be a beginning—rather than an end—of the Korean government’s investigation of multinational pharmaceutical companies for illicit rebates around the use of media companies and HCP roundtable meetings. The Prosecutor’s Office announced that it “will continue strict crackdown with the laws and principles to eradicate the illegal rebate.”
As South Korea expands its investigation, it has become advisable for multinational pharmaceutical companies with presence in South Korea to proactively and promptly look into their Korean operations in order to identify potential risks and implement timely remedial actions. Some companies have begun doing so, and as a result, will have an ability to identify any potential compliance issues that might be ongoing, and apply control and program enhancements as may be needed. Those who have not begun reviewing their operations risk falling behind and losing the opportunity to develop a compliance wall against the prosecutorial scrutiny that might be coming their way. South Korean authorities have a long history of targeting potential corruption within the pharmaceutical industry, and the significant Novartis fine of $48 million and suspension of reimbursement for products strongly suggests that there may be more to come.
With a strong presence throughout Asia, Europe, Latin America, and the United States, Paul Hastings LLP is recognized as one of the world’s most innovative global law firms. Paul Hastings was recently named a Life Sciences Practice Group of the Year, by Law360. Working under established and recognized U.S. attorney-client privileges and protections, our Seoul, Korea office advises both Korean companies doing business overseas and international clients doing business in Korea, providing strategic local support and seamless access to our global investigation and corporate resources.
Paul Hastings is unauthorized to practice Korean law and the preceding article is solely for purposes of relaying factual updates in Korea. This alert should not be construed as legal advice or a legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your attorney concerning any particular situation and any specific legal question you may have.