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Life sciences beware as China tackles health care corruption
2024 PRINDBRF 0075
• Practitioner Insights Commentaries
• February 9, 2024
(February 9, 2024) - Calvin Ding and Gejaa Gobena of Hogan Lovells examine China's increased health care enforcement in 2023 and what it means for life sciences companies regulated under U.S. and international anti-bribery and corruption laws.
The Chinese government began a crackdown on corruption in the health care sector in 2023. One priority is to root out collusion across the board. The crackdown not only involves Chinese law; it has implications for multinationals subject to the U.S. Foreign Corrupt Practices Act (FCPA) and other anti-bribery and corruption laws. This poses serious challenges for life sciences companies. Here, we discuss the issues.
The crackdown started amid concern over China's economic slowdown and rising unemployment. Government authorities, including criminal and civil enforcement agencies, in charge of overseeing health care released joint statements on tackling corruption risks. Investigations and penalties followed. At least 184 hospital heads from 23 provinces were probed — many were stripped of public positions and imprisoned.
On 11 May 2023, 14 national ministries and commissions issued the 2023 Priorities of Work on Rectifying Misconduct in the Fields of Healthcare Services and Medical Products' Procurement and Sales. It outlines the main issues of corruption in health care.
And on 21 July 2023, China's National Health Commission, a cabinet-level department of the State Council, along with nine other agencies, held a video conference. They set out a year-long, centralized campaign on corruption in the sector. After these announcements, provincial enforcement agencies in Beijing, Shanghai, Chongqing, Hainan, Yunnan, Sichuan, and Fujian opened new whistleblowing channels for reporting corruption.
Besides uprooting misconduct, the campaign aims to reduce medical costs and stimulate consumption in light of a slowing post-COVID economic recovery. One of its focuses and purposes is to rebuild consumer confidence and boost domestic demand. The campaign mirrors crackdowns on the private tutoring and real estate sectors. Those sought to make education- and housing-related expenses affordable, especially for low-income families.
Though most of the population has access to some form of public health insurance, many patients in China have difficulty finding quality health care. But targeting graft can reduce medical costs because corruption, such as unnecessary tests, procedures, and prescriptions, can drive up medical bills and inflate prices to consumers.
Over the past three years, a lot of funding went into implementing the zero-Covid policy, which strained the government's finances. And the burden on health care reform is worsening because the country's growing aging problem calls for more investment in the medical field. So, cracking down on corruption would give some relief to debt-laden local governments. It would also channel public resentment against corporate greed.
Campaign aims at the entire sector
Weeding out corruption in health care helps promote high-quality development and improve governance of the health care system. According to the National Health Commission, the campaign covers the entire industrial chain, including production, distribution, sales, and usage.
The 2023 Priorities of Work also outlines major targets of this anti-corruption campaign, including:
•Industrial or academic associations' transfers of improper benefits, disguised as academic conferences and donations, to health care professionals.
•Health care companies, distributors, and medical representatives giving kickbacks to health care professionals and tampering with the bidding and procurement process.
The National Health Commission emphasizes that fabricating academic conferences and transferring illegal benefits, for example, via sponsorship fees of academic conferences, will be investigated and disciplined. Health care companies operating in China should take note of the regulatory scrutiny on employees and their interactions with health care professionals and any benefits given to industrial or academic associations.
Under PRC laws, bribery can trigger administrative liabilities and expose individuals and companies to criminal penalties, if certain thresholds are met. Both the Drug Administrative Law and the Anti-Unfair Competition Law of China, for example, penalize bribery. They confiscate illegal proceeds, revoke relevant licenses, and/or impose administrative fines.
On 26 July 2023, the Standing Committee of the National People's Congress (NPC) circulated a draft 12th amendment to Criminal Law for public comments. In the draft, the NPC increased penalties for bribery givers, especially for bribes that involve sectors such as social security and health care.
Wider implications for life sciences companies
Beyond PRC law, companies that may be subject to the crackdown face potential liability under other countries' laws. Anti-bribery and anti-corruption efforts are a Biden administration foreign policy focus, and the U.S. Department of Justice (DOJ) has enhanced its work with foreign governments and increased its FCPA activity.
Life sciences companies remain in DOJ's sights, given their high number of touchpoints with government officials worldwide. Multinationals should review and, where necessary, update and improve their FCPA compliance programs. They should be alert to the administration's efforts when issues are identified and brace themselves for potentially major international investigations.
DOJ has a historically close relationship with UK law enforcement. Like the FCPA, the UK Bribery Act has broad jurisdictional reach. Companies may be subject to the Bribery Act if they are UK incorporated or deemed to carry on a business, or part of a business, in the United Kingdom. They could be liable for failure to prevent bribery committed by an associated person, who can be based anywhere in the world. DOJ collaborates with other foreign governments in Europe and South Asia as well.
Many of these countries' anti-bribery and corruption enforcement regimes emphasize self-disclosure in exchange for leniency. And this creates a set of risks life sciences companies must beware of.
The challenges of voluntary self-disclosure
Over the last seven years, changes in FCPA enforcement have largely been driven by the FCPA Corporate Enforcement Policy. It was created in April 2016 "to motivate companies to voluntarily self-disclose FCPA-related misconduct, fully cooperate with the Fraud Section, and, where appropriate, remediate flaws in their controls and compliance programs." The policy includes a critical benefit for engaging in all three steps: a potential declination.
In addressing compliance issues or conducting compliance investigations, you may identify potential anti-bribery and corruption issues that might be a candidate for self-disclosure.
But there are factors unique to life sciences companies that you should consider before proactively engaging the U.S. government under this policy:
•For one, does self-disclosure in the United States trigger disclosure obligations in other jurisdictions? Some jurisdictions may require mandatory reporting of potential corruption issues. Your company would have to consider disclosure obligations in other jurisdictions. There's no direct collaboration between the United States and China on anti-bribery and corruption. But, your company should think about the potential impact in jurisdictions like China. Law enforcement is sure to take notice of a self-disclosure in the United States, and enforcement has stepped up considerably.
•And if, despite fulfilling all elements of the policy, DOJ requires or pushes for a criminal conviction, it could result in substantial collateral consequences. It may exclude your company from U.S. federal health programs. The Department of Health and Human Services Office of Inspector General has been more aggressive on exclusion in recent years. It emphasizes that exclusion is mandatory for criminal convictions involving "fraud, theft, or other financial misconduct." Given the books and records violations often triggered by FCPA investigations, mandatory exclusion is a real possibility if your company were forced to accept a criminal conviction related to an anti-bribery and corruption issue.
For life sciences multinationals, it's critical to view anti-bribery and corruption issues as more than solely an FCPA concern. The government's crackdown on corruption together with the wider world's increasing anti-bribery and corruption efforts create an uncertain outlook.
While the benefits of voluntary self-disclosure under the FCPA are somewhat clear, for example, the decision whether to self-disclose is often less so. This underlines the need to develop and maintain a rigorous, multidimensional compliance program.
Calvin Ding is a partner in the litigation, arbitration, and employment practice group at Hogan Lovells. As a U.S.-trained attorney who has worked in China for over a decade, Ding leverages his international background and local expertise to advise clients in navigating their most pressing and challenging regulatory, compliance, internal and government investigations, litigation, and dispute resolution matters. He is based in Shanghai and can be reached at [email protected]. Gejaa Gobena is a partner in the firm's litigation, arbitration and employment practice group in Washington, D.C. Gobena uses his two decades of experience as a former senior prosecutor and private attorney to help companies and individuals navigate high-stakes investigations and government enforcement actions. He can be reached at [email protected]. This article was originally published Jan. 24, 2024, on the firm's website. Republished with permission.
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Gejaa Gobena| End of Document | © 2024 Thomson Reuters. No claim to original U.S. Government Works. |