China crackdown: Is it designed to cut healthcare costs?

Could China's very public bribery probe of GlaxoSmithKline ($GSK), its review of pharmaceutical pricing and a new crackdown on quality be a master scheme to get drugmakers to cut prices so that China can deliver on its promise of affordable healthcare for its citizens?

Pointing to China's looming $1 trillion healthcare bill, James Zimmerman, an attorney and former chairman of the American Chamber of Commerce in China, told Reuters he believed it could be. "My take is that the PRC government is targeting the industry given that cost-effective health care for the masses is a critical current policy objective for China's aging population," Zimmerman said. "[T]he government's legitimacy is at risk if it fails to deliver on its promise of affordable and accessible health care."

The government earlier said it was reviewing the price structure of 5 dozen drugmakers to see what it should pay for medicines, and the State Food and Drug Administration announced a new crackdown on Wednesday on adulterated and counterfeit drugs. Willy Lam, an adjunct professor at the Chinese University of Hong Kong, suggested to Reuters that authorities would like to mix up their own regulatory shortfalls with those of international drugmakers in the minds of citizens. "This seems to be the largest and the best orchestrated effort to target multinationals ... [T]hey seem to be blaming foreigners for problems they cannot solve themselves."

Of course, Western drugmakers are trying to figure out their way forward. Bribery is endemic in the country. China's underpaid doctors and underfunded hospitals, not to mention the functionaries who control access to licenses and distribution channels, often expect something of value in exchange for their help.

One of the four GSK executives arrested in the bribery investigation was featured on national television explaining how he used bribes to get business. According to Reuters, Liang Hong, vice president and operations manager for GSK in China, said the company used travel agencies to fake conferences that could be expensed so that there was cash to pay off officials and a way to hide the payments. In a rare display of transparency for China, Liang named the planning agency, the National Development and Reform Commission (NDRC), and the Ministry of Labor and Social Security, a price-setting agency, as two of the recipients of GSK payments. "To have contact with some government departments you need money that you cannot normally expense to the company," Liang explained in the interview.

GSK has said it is disappointed in the findings, is cooperating with authorities and will take appropriate action by the outcome of the investigation. While GSK is center stage in this drama, authorities have said they are looking into four other unnamed drugmakers for similar acts. Companies inside the sector, and out, are taking notice.

Bribery may be a part of the culture of business in China, but  "compliance" is the word of the moment. An employee with one unnamed multinational drugmaker told Reuters that employees are being warned not to stray from the letter of the law. "The message from the top is that if I have to choose between compliance and winning business, I would rather lose the business," the employee told Reuters, requesting anonymity so as not to draw attention.

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