Unorthodox injections sustain China’s healthcare system

July 16, 2013 4:10 pm

Unorthodox injections sustain China’s healthcare system

By Leslie Hook in Beijing

New protesters arrive every couple of minutes at the unmarked gates of the Ministry of Health in Beijing, coming in the faint hope that the national authorities will be able to help where their local hospitals and clinics have failed. One young mother carries a tattered notebook full of medical records, baby ultrasounds and official letters. She says she is trying to get treatment for her son, now aged eight, who has organ damage after drinking toxic infant formula as a baby. Another young woman unfurls graphic pictures of her injuries after a violent beating by police, and says she is here to protest against a local hospital that refused to treat her.

Extreme underfunding and overcrowding mark the Chinese medical system. Its dysfunctions also spawn rampant abuses and corruption that can make it a treacherous place for drug companies. As pressures rise on the Chinese government to act over poor healthcare quality and rising healthcare costs, officials have embarked on round after round of crackdowns and investigations into hospitals, doctors and drug companies.

It is against this background that the Chinese authorities this week accused UK drugmakerGlaxoSmith-Kline of being the ringleader in a half-a-billion-dollar bribery scandal involving 700 companies.

GSK said in a statement on Monday that it was “deeply concerned and disappointed by these serious allegations” raised by Chinese police, and has “zero tolerance for any behaviour of this nature”.

At the same time as the small group of petitioners was waiting at the ministry’s gates under the hot Beijing sun on Monday, Chinese TV stations across the country were lit up with the face of a man named Liang Hong, who was describing alleged practices by GSK that he said led to higher drug prices.

Mr Liang was GSK’s operations manager in China and is being detained by police as part of their investigation into alleged bribe taking and bribe giving by GSK’s China business. He told Chinese TV that he had used travel agencies to put through expenses “money that we spent when dealing with government departments that we couldn’t normally claim through our company”.

“Through my reflections in the last 10 days, I realised that the prices of drugs were raised by the cost of these sorts of operations,” he said contritely.

While Chinese media has been filled with details about the investigation into GSK, for many viewers the high-profile bribery investigation is just another example of the dysfunction of their healthcare system.

Whether it is doctors who ask for bribes before performing surgery, clinics that kick out cancer patients near the end of their life to save money or drug companies giving kickbacks to doctors, stories of malpractice in China’s healthcare system are rife.

With scanty insurance coverage, a shortage of doctors, too few clinics in rural areas and poor regulation, working people’s lack of access to affordable healthcare in China has for years been a simmering source of discontent.

Since 2009, Chinese authorities have been trying to address this through healthcare reform, which has included building more hospitals, extending insurance coverage and doubling state spending on healthcare. Despite the improvements brought about by these schemes, out-of-pocket payments made by Chinese patients are still among the highest of any major economy, averaging close to 40 per cent of treatment costs.

One of the most intractable problems has been funding for Chinese hospitals, which operate under artificially low state-controlled prices and fees, but are largely responsible for covering their own costs.

As a result, most hospitals rely on drug sales through the hospital pharmacy for most of their profits. Routine over-prescription of drugs is the result. In 2010, Chinese authorities punished more than 15,000 cases of improper drug pricing or over-prescription, amounting to Rmb180m of illegal income for hospitals.

“It’s very hard to remove the malignant tumour in this policy,” said Zhou Xiaoqin, professor at Beijing University of Chinese Medicine. “How can public hospitals survive without their dependence on drug sales? If the authorities don’t make the compensation mechanism work in a reasonable way, it’s actually forcing the good guys to be bad people.”

Payment by drug companies to doctors and hospitals for prescriptions is standard practice in China, according to industry executives and analysts. A recent study by consultancy LEK estimated that “incentives” provided to doctors for generic drug sales are typically equivalent to 40-50 per cent of the final drug price paid by patients.

“China does not permit bribery . . . But it is generally widely known that there are cash payments in envelopes made to doctors,” said Helen Chen, pharmaceutical specialist at consultancy LEK. Hospital sponsorship programmes, rebates and sponsorship for academic conferences were also common forms of incentives provided by drug companies to doctors, she said.

A former pharmaceutical executive in China said the police allegations against GSK sounded like practices that were “common” for many companies operating in China.

“The older generation of doctors are so used to receiving such a low salary that [kickbacks] was the only way they could receive extra salary,” the executive said. “There was always the fear at multinationals that some disgruntled employee who wanted revenge would leak it to the press.”

China’s fragmented drug licensing system also provides ample opportunity for rent seeking. For the most common drugs used in hospitals, drugs companies must win the right to sell their drugs by bidding in tenders in each province separately.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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