Drug approval and tendering system in spotlight, report He Na and Jiang Xueqing in Beijing, and Han Junhong in Changchun

Sun Xiaoyan used to be a frequent visitor to hospitals, but not as a patient.

She maintains close links with a number of doctors and nurses and warmly calls them "brothers" and "sisters", and her close relatives and friends always get to see a doctor without waiting in line.

The 34-year-old independent pharmaceutical sales representative from Nong'an county in Jilin province knows exactly how China's medical system works, and she also knows how to get rich from it.

However, Sun hasn't visited any hospitals for the past two months. Instead of paying visits or inviting doctors and nurses for dinner or entertainment, she has been killing time at home, watching movies on her computer and playing games on her phone.

She always carries two smartphones in her bag. The one with the white cover is for personal use, while the black one is for work. However, right now Sun has turned off the black phone.

She said she has no idea when she will return to the hospitals, but it won't be until after the "two crackdowns".

The first of the crackdowns Sun mentioned is an anti-corruption campaign aimed at the medical sector. It was started in early July following a scandal involving the Chinese unit of British pharmaceutical giant GlaxoSmithKline, which is being investigated for suspected bribery and tax-related offenses.

An initial police investigation found that GSK China increased its sales by offering bribes to doctors and hospitals, thus pushing up drug prices and undermining patients' interests.

Second, the State Administration for Industry and Commerce announced on Aug 13 that a campaign focusing on illegal competition, especially bribery in the medical industry, will run from Aug 15 until the end of November.

Insiders believe the investigations will initially target foreign pharmaceutical companies before being expanded nationwide.

"I heard that plainclothes police are monitoring major hospitals, and several pharmaceutical sales reps have already been detained," said Sun.

In the wake of the GSK allegations, which the Chinese authorities claim company executives have privately admitted, the National Development and Reform Commission ordered 60 drug manufacturers, including 27 foreign companies, to submit their cost and pricing files for review.

Experts believe that the anti-corruption drive triggered by the case will embrace the medical industry nationwide.

"The allegations of bribery are not intentionally aimed at foreign pharmaceutical companies. No matter if the companies are Chinese or foreign, problems such as this are common in the drug distribution process. That should sound the alarm for all pharmaceutical companies and doctors," said Zhang Yanling, president of the Chinese Medical Doctor Association.

The association is planning to establish a method of evaluating medical practitioners based on their professional ethics. Those found to have seriously violated the code of conduct will be placed on a blacklist and will not be recommended for hire by medical institutions.

Deep-rooted problems

Song Shan, a regional manager at a large pharmaceutical plant in Guangdong province, who has worked in the medical industry for more than two decades, said the problems are deep-rooted.

"Foreign pharmaceutical enterprises are no different from their domestic peers. If they want to survive and make a profit, they need to go through the channels of hospitals and doctors," he said.

"Medical resources in China are highly concentrated in, and monopolized by, the large public hospitals. Therefore, the doctors at these hospitals naturally exercise great power," he said.

Gaining the confidence of doctors is not easy because they are now very cautious, so a lot of businesses hire public-relation experts to train their sales reps, he said.

According to Song, besides providing kickbacks for medical staff, the reps even extend their largesse to the families of doctors and hospital chiefs and, if the customer is deemed important enough, greater temptations, such as overseas travel, will be offered.

"Most of each kickback payment ends up in the doctor's pocket. Compared with the doctors, the amount that the manufacturers and sales representatives receive is much lower," he said.

Song recalled taking his son to a public hospital in May because the boy was running a fever. The doctor prescribed three boxes of a foreign-brand antipyretic at a cost of 70 yuan ($11) per box.

"What made me angry was that the drug he prescribed can have a serious adverse effect on children's growth and should not be recommended for kids. I pounded on his desk and questioned the prescription. When he learned that I was a drug industry professional, the doctor's attitude underwent a U-turn and he prescribed two boxes of a much cheaper domestic drug," he said.

Zhang Shuang, a manager at a large State-owned pharmaceutical company in Jilin, said, "As pharmaceutical manufacturers, we hate commercial bribery. However, there is no rule of fair competition in our market, so it's almost impossible to get your drugs on the prescription list if you don't pay high kickbacks."

Long profit chain

He Dong, general manager of a large pharmaceutical manufacturer in Changchun, said commercial bribery in the medical sector involves a long profit chain and the sales reps are at the lowest level. Even if the police arrested every representative, good and bad, or abolished the job, bribery would still exist and another group of people would rapidly appear under a different job title and commit the same acts.

"The crackdown on commercial bribery is necessary and timely, but just focusing on the sales representatives is putting the cart before the horse," he said.

While He is worried that the crackdown may force bribery further underground, he stressed that the practice is only the tip of the industry's iceberg of corruption.

He's words were echoed by Song, who said the really serious problems lie in the approval process for new drugs and the bidding process for government and hospital drugs.

"Too many government departments are given rights over drug approval and tender. Under the current bidding system, drugs that provide effective treatment at a reasonable price are not guaranteed to win approval or be listed in the local basic drug category, or the hospital drug category. Good relations with government departments always carry more weight," Song said.

That cozy relationship is also one of the reasons companies prefer to cultivate good relations with government departments rather than investing time and energy in the research and development of new drugs, he said.

"The involvement of so many government departments equals zero management. Sometimes, these departments intentionally erect barriers if drug companies forget to shower them with gifts or money," he said.

"A new medicine needs at least four to five years of research and development before it can be put on the market. Without close relationships with government departments, pharmaceutical manufacturers seldom dare to invest in new drugs. To save on costs, many manufactures will make small changes to existing treatments, give them a new name and then apply for approval," said He.

In the long run, the system is harmful to innovation and development across the entire industry. "It's essential that we introduce an independent nongovernmental body to oversee the approval of new drugs and the bidding process for the basic drug category in each province. Government departments should only be involved to ensure that supervision is correctly carried out," he said.

Low hospital investment

Pharmaceutical sales have been rising rapidly in China. Total sales reached 600 billion yuan last year, and average annual growth has exceeded 20 percent during the past five years, compared with 0.3 percent in the developed markets, according to statistics from the industry researcher IMS Health.

"Most hospitals follow their own bidding rules when deciding which drugs to buy and prescribe. When drugs are of similar quality and effectiveness, the one with the lower price will always win the bid, but there are no strict rules demanding that hospitals must prescribe those low-priced drugs to patients," said Guo Fanli, an analyst at China Investment Consulting Co.

"Under the system where hospital expenditure is covered by medical revenues, doctors prescribe expensive medicines so they can rake off a decent kickback. The manufacturers overinflate the market prices of their drugs to leave more room for discounts and to ensure the doctors receive good kickbacks. Expensive drugs also increase hospital revenues because the patients pay so much for them. That's why expensive drugs sell better than cheap ones in hospitals," he said.

Zhang said a lack of government investment in medical institutions and the low salaries earned by Chinese doctors, compared with their Western peers, simply exacerbate the problem.

In 2011, China's total healthcare expenditure was 2.43 trillion yuan, equivalent to just 5.15 percent of gross domestic product, according to statistics from the National Health and Family Planning Commission.

Generally speaking, government funding covers around 20 percent of a public hospital's annual expenditure, but the percentage varies from one hospital to another, said Zhang.

During a previous interview with China Daily, Chen Zhongqiang, professor at the orthopedic department of Peking University Third Hospital, said government funding amounts to just 5 percent of the hospital's annual revenue which, in 2011, was 2.25 billion yuan.

"I hope the bribery scandals will prompt the government to accelerate healthcare reform by increasing investment in public hospitals and raising doctors' salaries to a reasonable level that matches their skills and hard work," said Zhang.

Guo Fanli said the GSK case is unlikely to affect the development of China's medical industry. On the contrary, the case will boost medical companies' share prices because the warning the government has delivered will force some manufacturers to cease illegal competition, which would help to clean up the competitive environment.

No easy solutions

He called on the authorities to enact new laws and strengthen the existing rules to ensure that violators are heavily penalized.

Many experts have called for the separation of medical care services and drug sales in hospitals, saying that such a move would result in a severing of the links between service providers, the purchasers of medicines and the pharmaceutical companies, thereby reducing the opportunity and risk of collusion.

Guo was of the same opinion, but warned that under the current system, whereby hospital expenditures are reliant on the sales of medicines, there are plenty of interested parties, meaning the problem can't be solved overnight.

"I hope the investigation into GSK is the beginning of the government's determination to root out corruption in medical industry, but equally, I hope it's not the end," Guo said.

Contact the writers at hena@chinadaily.com.cn and jiangxueqing@chinadaily.com.cn

(China Daily USA 09/12/2013 page7)