Compliance in China – “Donations”

11.19.15 | By John Thorpe

New regulatory developments and a wave of anti-corruption prosecutions are beginning to lift the veil of ambiguity that has complicated foreign investment in China for LSCs.  Without clear guidelines governing their interactions with healthcare providers (HCPs) or organizations (HCOs), LSCs have struggled to develop risk-managed compliance architectures for business operations and third party vendor relationships.

Donations to HCPs and HCOs in China is now an area of increasingly high risk as curbing illicit interactions conducted under the guise of a “donation” has become an enforcement priority for both Chinese and foreign enforcement bodies. For LSCs seeking to enter the Chinese market, there exists risk at every level in a system historically beleaguered by bribery and graft.  The Chinese government sets drug prices, which dictate “the margin structure for the state-controlled importers, distributers as well as sub-distributors and hospitals.”  Often, LSCs seeking access to this distribution network encounter barriers-to-entry when essential participants demand enhanced margins as the price to play ball.  Further, the red tape created by complex regulations surrounding the sale of imported products by Chinese affiliates of foreign companies create another incentive for entrants to risk potentially devastating legal or business consequences by using illicit means to cut through bureaucratic tape faster than competitors.

This week, Polaris will examine new Chinese donation rules published in October by the National Health and Family Planning Commission (NHFPC), which is China’s national healthcare regulator. The rules will hopefully play a significant role in reforming the provision of healthcare in China. Among other things, the rules could begin to circumscribe one avenue by which Chinese doctors, arguably the most powerful players in the market given their prescription power, receive bribes or kickbacks.

Chinese Donation Rules Get a Boost

The new donation rules, entitled the “Administrative Measures on Accepting Donations for Public Welfare by Healthcare Entities” (2015 Donation Rules), were passed and became effective on August 26th, 2015.  The 2015 Donation Rules supersede the old rules (passed in 2007) entitled: “Provision Rules on Receiving Social Donations and Sponsorships by Healthcare Entities”.

From a legal perspective, the 2015 Donation Rules do not apply directly to LSCs. Rather, they apply to the receipt of donations from foreign or domestic donors by healthcare donees supervised by the NHFPC and its local counterparts, which include: “healthcare institutions, social public welfare associations, foundations and other charitable social organizations.”

The 2015 Donation Rules provide greater clarity for LSCs with respect to donations. Broadly, they serve two main purposes:

1. To update and add new requirements to an earlier set of healthcare donation rules and

2. To legitimate the purpose of healthcare donations.

The 2015 Donation Rules explicitly endorse donations and sponsorships for numerous purposes, including training, academic activities, and scientific research as well as public healthcare service and education. Donations given to healthcare entities must be received in the entities’ name and not in the names of individual HCPs or internal departments.  If a donation is given for the training of healthcare professionals, for academic activities, or for scientific research, a donor may not designate individual beneficiaries for the donation.

Donations are prohibited in the new rules if they are, among other things, connected to commercial activities, raise a suspicion of being unfair corruption or a part of commercial bribery, linked to the procurement of goods or services, or serving a political purpose.

In addition to providing guidance with respect to what does and does not constitute an appropriate donation, the 2015 Donation Rules also create the beginnings of a transparent set of checks and balances across the donation process.  Donors must donate through bank transfers.  Healthcare entities receiving donations must follow an evaluation process prior to the acceptance of a donation to ensure compliance with the new rules.  Further, they must publicize their donation acceptance procedures and must publicly release information about any donations they accept (e.g., on their website or through the local news).  These publications must occur annually by March 31st of every year and within 30 working days of the completion of project audit reports and performance evaluations.  Any donation or donations received by a covered entity under the new rules is auditable on a periodic basis by the NHFPC.

Despite the marked improvement over existing regulations, the 2015 Donation Rules still leave some ambiguity with respect to the extent of their scope.  The Rules define “donation” as “public welfare support and assistance in the form of funds or property” that is provided on a voluntary basis and “not for return” to healthcare entities.  By this definition, it appears that at least some form of sponsorships and grants can also fall into the purveyance of the 2015 Donation Rules.  It does not appear that “conference sponsorships” fall under the rules, but this is not yet clear.  Problematically, the line demarcating the difference between a donation, grant, and sponsorship is not always clear in any setting without explicit statutory parameters.

The Writing on the Wall

The new rules have emerged in the wake of a number of well-publicized settlements between biopharmaceutical companies and the United States government under the Foreign Corrupt Practices Act (FCPA). These cases were initiated because of several documented instances of inappropriate interactions with Chinese HCPs and HCOs.

For example, in October, the Securities and Exchange Commission (SEC) announced that Bristol-Myers Squibb (BMS) had agreed to settle charges asserting that its joint venture in China made cash payments and provided other benefits to health care providers at state-owned and state-controlled hospitals in exchange for prescription sales. The company agreed to pay $14 million to settle the SEC’s finding that it violated the FCPA and reaped greater than $11 million in profits from its illicit actions, according to the agency. And BMS is not the only company to recently run afoul of the FCPA.  Mead Johnson Nutrition recently settled with the SEC for $12 million by funding improper payments through third-party distributors to pay “Chinese health care professionals to recommend Mead Johnson Nutrition products and share patients’ contact information.”

LSCs should use the new guidelines as an opportunity to review and revise existing policies and procedures relating to donations, sponsorships, and grants in China. Further, given the risk of both internal and foreign prosecution, any such update should become a part of programmatic effort to periodically review prosecutorial patterns and the evolving Chinese regulatory landscape.  As the enforcement bodies in China tasked with spearheading anti-kickback and fraud efforts (the Administrations for Industry and Commerce) are not beholden to the NHFPC, there may not be direct accord between the two organizations with respect to the definition of donation and the gray lines defining where the risk precipice lies.  China’s major anti-bribery rules, detailed within the Anti-Unfair Competition Law, provide Chines authorities with considerable leeway with respect to both interpreting and implementing bribery rules.  Bribery itself is not defined within the statute.  Accordingly, risk must be managed in the context of maintaining an operational understanding of regulatory enforcement patterns as they develop in real time.

If companies do not already have robust approval systems to ensure that their donations in China are appropriate and legitimate, it should become an immediate priority. Following leading compliance practices, such a system should be monitored and subject to regular audits to verify that company policies and procedures are being followed in the field where the rubber hits the road.  This is especially true for LSCs utilizing third party vendors to enter the Chinese market and to facilitate outreach to HCPs and HCOs.  Given that responsibility for the illicit activities of third party vendors lies with the contracting company in most circumstances, contracting companies must ensure that vendors follow company protocol and remain open to regular audits.