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GSK’s involvement in the bribery in China fi- nally led to something more than GSK. After the arrestment of four senior executives of GSK， GSK’s acknowledgement of bribery and apologies， more foreign pharmaceutical companies are brought under the limelight for their possible bribery problems in China.
An anti-corruption storm has already started in the drug market of China. The list of companies involved in this storm included Sanofi， AstraZeneca， Roche， Pfizer and Bayer and is still growing. Several domestic pharmaceutical companies are also involved.
Analysts say that the bribery cases of multinational pharmaceutical companies revealed the erosion into the “chain”of China’s medicine industry， covering testing， licensing， pricing， bidding and the medical insurance. With great PR ability and the covert bribery methods， multinational pharmaceutical companies， as well as some big domestic companies， have already been able to have their own marks on the policy and firmly grasped the market， during which they earn a lot of profits while improving the medicine price in China.
Actually， GSK’s bribery is not an accidental case. The same problem could be in almost every big player in the Chinese drug market. Some domestic companies are even worse than foreign companies. Bribery seems to be a “hidden rule”to every pharmaceutical company in China， telling us that GSK is just a goat while the real demons are the unreasonable systems of drug supply， hospitals and even healthcare industry in this country.
The problematic system of pricing original drugs
The lofty drug price and high cost of going to the doctor， as well as the foreign drug companies’ increasing market share in China’s medicine market， is now grilling the Chinese people. It is widely believed that foreign pharmaceutical companies are one of the main driving forces to push up the drug price in China.
Presently， there are 1，500 foreign-funded drug enterprises in China and the Top 20 foreign drug companies all have already set up joint ventures or even fully-owned enterprises in China. The imported drugs or drugs developed by joint ventures have taken more than 50% of the entire medicine market of China.
The fast development of foreign pharmaceutical companies is to a large extent a result from its superb R&D power and high quality of products. But GSK’s involvement in bribery also explained another important force of their superpower in China. Liang Hong， who was the former vice president of GSK China and was arrested as the suspect of bribery， said that “（pharmaceutical companies） need to deal with the China Food and Drug Administration in registration of drugs， need to get along with the National Development and Reform Commission （NDRC） for the drug price， have to negotiate with the Ministry of Human Resources and Social Security for the qualification in the medical care and must build close relations with presidents， heads of pharmacies and departmental leaders of each hospital for the entry into hospitals”. Foreign companies did very well in these parts and thus got the advantages in the competition with local drug companies. Among all their advantages， the “super national treatment” of them， which is actually the permission of them to fix their original drugs independently， sparked the most complaints and doubts.
The original drug refers to the drug whose patent protection has expired. It is also called original new drug. The National Planning Commission （now known as the NDRC） issued a new drug pricing system in 2000 that allowed the original drugs to be fixed independently. This became the“special benefit” for foreign companies， because the price of original drugs is much higher than generic drugs in China. For example， Heptodin of GSK had the generic version in 2009， but the original Heptodin’s price is now still three times as high as the generic drug.
“In the bidding process， the drugs are divided into several classes， including original drugs of foreign companies， drugs exclusive to big domestic companies whose prices are separately determined by the NDRC， and ordinary generic drugs. The previous two usually have their prices under protection， meaning that the mandatory decrease of drug price cannot affect them too much，” said a source who once worked as drug representative in China.
According to him， the original drug takes a big share of the drugs sold by hospitals – 70% of drugs are sold through hospitals in China – and thus the entire drug price cannot drop. “And the hospitals have an unwritten rule about ‘two brands for one kind of drug’， saying that a hospital usually chooses an imported brand and a domestic brand for one kind of drug.” This paves the way for foreign drugs to get into China’s hospitals and take a high proportion of drugs sold in hospitals.
Dr. Hu Yinlian at the China National Academy of Administration made a research showing that 60%-65% of the drugs sold by the tertiary hospitals and hospitals in major cities of China are the imported drugs， original drugs and patented new drugs supplied by foreign pharmaceutical companies.
The NDRC published a rule in 2006， fixing the prices of drugs sold by hospitals to patients at the level of maximally 15% higher than the prices they get from drug companies. And in the current system of hospitals， the income from drugs is closely related with the benefits of hospitals and physicians. Therefore， doctors favor the foreign branded drugs， whose original prices are high， and would like to sell as many drugs as possible to patients – sometimes even more than necessary. Patients， who can get reimbursement for their cost of going to hospital from the medical insurance， would like to use those expensive drugs， as long as they are in the list of medical insurance， because the reimbursement is based on the cost of drugs or procedures covered by the medical insurance instead of the total cost. Drug price might be lowered
Such a protective policy was so much doubted and criticized that the NDRC once fixed a new rule with the attempt to deprive original drugs of the priority of fixing drug prices independently. However， such a rule has never been officially implemented even though it was finished in 2010. In addition， some experts believe that the drastic drop of original drugs is not good for keeping the quality of drugs.
The Ministry of Human Resources and Social Security once thought of adding “the price negotiation system” into the list of drugs in the medical insurance. This system meant to talk foreign companies into lowering the original drug price so that more of them can get into the list of medical insurance. However， this turned out to be fruitless as well.
Then， here comes one suggestion： increasing the use of generic drugs made by big domestic companies and further spreading the system of essential drugs.
It is known that the system of essential drugs in China is adopted in the small and rudimentary healthcare organiza- tions， like the clinics and hospitals in towns and small cities. The healthcare department is now working on the plan to spread this system to big hospitals. Zheng Hong， director of the Medicine Policy Department at the National Health and Family Planning Commission said that the rule about the proportion of essential drugs in big hospitals is likely to come out soon.
The spread of the system of essential drugs mean the increasing proportion of the ordinary and cheap drugs in the entire drug market. But here is a problem when it comes to the hospitals， because the drugs need to win the bidding to be sold in the hospitals.
Here comes another advantage of foreign drug companies， which are not only good at dealing with government， but also proficient in winning the favor of hospitals. According to Liang Hong， GSK China could invite physicians to overseas tours， help them publish professional assays and recruit their children to persuade them to sell GSK’s drugs. As reported， 7%-10% of the price of GSK’s drugs was actually the commission given to hospitals and the cost of commercial bribery takes 20%-30% of GSK China’s total income from drugs.
Compared with domestic pharmaceutical companies， foreign companies put a smaller portion of their income into bribery – according to aforementioned drug representative， the cost of drug circulation （including the income of drug representatives， commissions given to physicians and so on） takes 40%-45% of the total drug price – but these additional costs， especially those put into the bribery， are all eventually afforded by patients， which is thus the main force to push up the drug price. After the initiation of anti-corruption storm， GSK announced that “it plans to change the operating pattern to lower the operating cost contained in the drug price so that we can provide GSK’s high-quality products for more Chinese patients”. This is apprehended as a signal of lowering the drug price from GSK， which might be a positive example for other foreign drug companies.
End the unreasonable system
“We should divide the objects of GSK’s bribes and treat them differently”， said Cai Jiangnan， director of the Medical Management and Policy Research Center at CEIBS. “The bribes given to governmental officials reflect the problems in the bidding and pricing systems； while the bribes givens to physicians reflect the failure to solve the problem of hospital system.”
The problem in the hospital system is commonly known as “covering the hospital expenses with the revenue from drugs”. Many people believe that it is necessary to promote the reform to the public hospitals to end the situation of“covering the hospital expenses with the revenue from drugs”.
Zhu Hengpeng， a fellow at the Chinese Academy of Social Sciences， said that the extraordinarily high drug price in China is directly caused by the monopolization of public hospitals and their heavy reliance on the income from drugs. More profoundly， this is a result of the mismatch between the public hospital-led medical system and the market-oriented economy. Therefore， it is not enough to beat GSK and other companies offering bribes， the medical reform， which gives priority to the reform to public hospitals， is also an essential element.
The medical reform established the end of “covering the hospital expenses with the revenue from drugs” as its main objective from the start of the 12th Five-Year Plan （2011-2015）. The main solution is to forbid hospitals to sell drugs at a higher price than they get the drugs. Instead， the hospitals can charge patients more for the medical services and get the governmental subsidies to cover their expenses.
In 2012， the experiment was started in some pilot cities and counties. However， questions remain clouding this reform. People are mainly concerning whether the government can timely and sufficiently give subsidies to hospitals to maintain their operation， whether the increase of medical service cost could be a burden for patient and whether this policy， not a law， can stop physicians from asking for commissions from drug suppliers.
A senior executive from a large domestic pharmaceutical company says that this reform does not propose a perfect solution to the corruption of physicians， but it has stopped hospitals from gaining benefits from drugs， turning the drugs into cost of hospitals. That will force the hospitals to watch closely over their physicians so that they could not use drugs at their will to increase the cost of hospitals.
But this will definitely offend the pharmaceutical companies， which find that their precious clients – hospitals – might consider buying their products or not for the sake of their own cost. These pharmaceutical companies might take some measures against this reform， which might become the biggest resistance.
Anyway， the exposure of bribery cases of GSK and other foreign pharmaceutical companies has already become a good opportunity to promote the medical reform in China.
An anti-corruption storm has already started in the drug market of China. The list of companies involved in this storm included Sanofi， AstraZeneca， Roche， Pfizer and Bayer and is still growing. Several domestic pharmaceutical companies are also involved.
Analysts say that the bribery cases of multinational pharmaceutical companies revealed the erosion into the “chain”of China’s medicine industry， covering testing， licensing， pricing， bidding and the medical insurance. With great PR ability and the covert bribery methods， multinational pharmaceutical companies， as well as some big domestic companies， have already been able to have their own marks on the policy and firmly grasped the market， during which they earn a lot of profits while improving the medicine price in China.
Actually， GSK’s bribery is not an accidental case. The same problem could be in almost every big player in the Chinese drug market. Some domestic companies are even worse than foreign companies. Bribery seems to be a “hidden rule”to every pharmaceutical company in China， telling us that GSK is just a goat while the real demons are the unreasonable systems of drug supply， hospitals and even healthcare industry in this country.
The problematic system of pricing original drugs
The lofty drug price and high cost of going to the doctor， as well as the foreign drug companies’ increasing market share in China’s medicine market， is now grilling the Chinese people. It is widely believed that foreign pharmaceutical companies are one of the main driving forces to push up the drug price in China.
Presently， there are 1，500 foreign-funded drug enterprises in China and the Top 20 foreign drug companies all have already set up joint ventures or even fully-owned enterprises in China. The imported drugs or drugs developed by joint ventures have taken more than 50% of the entire medicine market of China.
The fast development of foreign pharmaceutical companies is to a large extent a result from its superb R&D power and high quality of products. But GSK’s involvement in bribery also explained another important force of their superpower in China. Liang Hong， who was the former vice president of GSK China and was arrested as the suspect of bribery， said that “（pharmaceutical companies） need to deal with the China Food and Drug Administration in registration of drugs， need to get along with the National Development and Reform Commission （NDRC） for the drug price， have to negotiate with the Ministry of Human Resources and Social Security for the qualification in the medical care and must build close relations with presidents， heads of pharmacies and departmental leaders of each hospital for the entry into hospitals”. Foreign companies did very well in these parts and thus got the advantages in the competition with local drug companies. Among all their advantages， the “super national treatment” of them， which is actually the permission of them to fix their original drugs independently， sparked the most complaints and doubts.
The original drug refers to the drug whose patent protection has expired. It is also called original new drug. The National Planning Commission （now known as the NDRC） issued a new drug pricing system in 2000 that allowed the original drugs to be fixed independently. This became the“special benefit” for foreign companies， because the price of original drugs is much higher than generic drugs in China. For example， Heptodin of GSK had the generic version in 2009， but the original Heptodin’s price is now still three times as high as the generic drug.
“In the bidding process， the drugs are divided into several classes， including original drugs of foreign companies， drugs exclusive to big domestic companies whose prices are separately determined by the NDRC， and ordinary generic drugs. The previous two usually have their prices under protection， meaning that the mandatory decrease of drug price cannot affect them too much，” said a source who once worked as drug representative in China.
According to him， the original drug takes a big share of the drugs sold by hospitals – 70% of drugs are sold through hospitals in China – and thus the entire drug price cannot drop. “And the hospitals have an unwritten rule about ‘two brands for one kind of drug’， saying that a hospital usually chooses an imported brand and a domestic brand for one kind of drug.” This paves the way for foreign drugs to get into China’s hospitals and take a high proportion of drugs sold in hospitals.
Dr. Hu Yinlian at the China National Academy of Administration made a research showing that 60%-65% of the drugs sold by the tertiary hospitals and hospitals in major cities of China are the imported drugs， original drugs and patented new drugs supplied by foreign pharmaceutical companies.
The NDRC published a rule in 2006， fixing the prices of drugs sold by hospitals to patients at the level of maximally 15% higher than the prices they get from drug companies. And in the current system of hospitals， the income from drugs is closely related with the benefits of hospitals and physicians. Therefore， doctors favor the foreign branded drugs， whose original prices are high， and would like to sell as many drugs as possible to patients – sometimes even more than necessary. Patients， who can get reimbursement for their cost of going to hospital from the medical insurance， would like to use those expensive drugs， as long as they are in the list of medical insurance， because the reimbursement is based on the cost of drugs or procedures covered by the medical insurance instead of the total cost. Drug price might be lowered
Such a protective policy was so much doubted and criticized that the NDRC once fixed a new rule with the attempt to deprive original drugs of the priority of fixing drug prices independently. However， such a rule has never been officially implemented even though it was finished in 2010. In addition， some experts believe that the drastic drop of original drugs is not good for keeping the quality of drugs.
The Ministry of Human Resources and Social Security once thought of adding “the price negotiation system” into the list of drugs in the medical insurance. This system meant to talk foreign companies into lowering the original drug price so that more of them can get into the list of medical insurance. However， this turned out to be fruitless as well.
Then， here comes one suggestion： increasing the use of generic drugs made by big domestic companies and further spreading the system of essential drugs.
It is known that the system of essential drugs in China is adopted in the small and rudimentary healthcare organiza- tions， like the clinics and hospitals in towns and small cities. The healthcare department is now working on the plan to spread this system to big hospitals. Zheng Hong， director of the Medicine Policy Department at the National Health and Family Planning Commission said that the rule about the proportion of essential drugs in big hospitals is likely to come out soon.
The spread of the system of essential drugs mean the increasing proportion of the ordinary and cheap drugs in the entire drug market. But here is a problem when it comes to the hospitals， because the drugs need to win the bidding to be sold in the hospitals.
Here comes another advantage of foreign drug companies， which are not only good at dealing with government， but also proficient in winning the favor of hospitals. According to Liang Hong， GSK China could invite physicians to overseas tours， help them publish professional assays and recruit their children to persuade them to sell GSK’s drugs. As reported， 7%-10% of the price of GSK’s drugs was actually the commission given to hospitals and the cost of commercial bribery takes 20%-30% of GSK China’s total income from drugs.
Compared with domestic pharmaceutical companies， foreign companies put a smaller portion of their income into bribery – according to aforementioned drug representative， the cost of drug circulation （including the income of drug representatives， commissions given to physicians and so on） takes 40%-45% of the total drug price – but these additional costs， especially those put into the bribery， are all eventually afforded by patients， which is thus the main force to push up the drug price. After the initiation of anti-corruption storm， GSK announced that “it plans to change the operating pattern to lower the operating cost contained in the drug price so that we can provide GSK’s high-quality products for more Chinese patients”. This is apprehended as a signal of lowering the drug price from GSK， which might be a positive example for other foreign drug companies.
End the unreasonable system
“We should divide the objects of GSK’s bribes and treat them differently”， said Cai Jiangnan， director of the Medical Management and Policy Research Center at CEIBS. “The bribes given to governmental officials reflect the problems in the bidding and pricing systems； while the bribes givens to physicians reflect the failure to solve the problem of hospital system.”
The problem in the hospital system is commonly known as “covering the hospital expenses with the revenue from drugs”. Many people believe that it is necessary to promote the reform to the public hospitals to end the situation of“covering the hospital expenses with the revenue from drugs”.
Zhu Hengpeng， a fellow at the Chinese Academy of Social Sciences， said that the extraordinarily high drug price in China is directly caused by the monopolization of public hospitals and their heavy reliance on the income from drugs. More profoundly， this is a result of the mismatch between the public hospital-led medical system and the market-oriented economy. Therefore， it is not enough to beat GSK and other companies offering bribes， the medical reform， which gives priority to the reform to public hospitals， is also an essential element.
The medical reform established the end of “covering the hospital expenses with the revenue from drugs” as its main objective from the start of the 12th Five-Year Plan （2011-2015）. The main solution is to forbid hospitals to sell drugs at a higher price than they get the drugs. Instead， the hospitals can charge patients more for the medical services and get the governmental subsidies to cover their expenses.
In 2012， the experiment was started in some pilot cities and counties. However， questions remain clouding this reform. People are mainly concerning whether the government can timely and sufficiently give subsidies to hospitals to maintain their operation， whether the increase of medical service cost could be a burden for patient and whether this policy， not a law， can stop physicians from asking for commissions from drug suppliers.
A senior executive from a large domestic pharmaceutical company says that this reform does not propose a perfect solution to the corruption of physicians， but it has stopped hospitals from gaining benefits from drugs， turning the drugs into cost of hospitals. That will force the hospitals to watch closely over their physicians so that they could not use drugs at their will to increase the cost of hospitals.
But this will definitely offend the pharmaceutical companies， which find that their precious clients – hospitals – might consider buying their products or not for the sake of their own cost. These pharmaceutical companies might take some measures against this reform， which might become the biggest resistance.
Anyway， the exposure of bribery cases of GSK and other foreign pharmaceutical companies has already become a good opportunity to promote the medical reform in China.