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U.S. Drug Manufacturers Beware: Application of the PRC Antibribery Law to Drug Marketing and Promotional Practices in China

RONG MOU∗1

I. INTRODUCTION

China’s ongoing economic growth and tremendous market potentials have presented many opportunities for American businesses, no exception to the pharmaceutical industry. According to a report issued by the Pharmaceutical Research and Manufacturers of America (PhRMA), an organization representing the country’s leading research-based pharmaceutical and biotechnology companies, up to April 2000 there are 17 major American research-based pharmaceutical companies in China which enjoy a 12 percent share of the Chinese pharmaceutical market of US$6 billion, or around US$720 million in annual sales. PhRMA member companies employ almost 20,000 workers directly in their operations in China and have invested some US$1 billion
1∗ LLM Candidate 2002, Harvard Law School, Cambridge, Massachusetts, Email: rmou@law.harvard.edu. Student ID: 70553554.

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in China over the past decade.2 Doing business in China, however, the U.S. pharmaceutical companies are in a business and legal environment that is remarkably diﬀerent from what they are familiar with in their home country. Among other barriers, restrictions on the communication between pharmaceutical companies and physicians/pharmacists recently caused signiﬁcant concerns of the industry. In a policy statement prepared in December 2001, the PhRMA summarized these concerns as follows:3

“ An additional market access concern revolves around a persistent practice in some jurisdictions of banning pharmaceutical sales representative access to hospitals. a number of Chinese provinces and cities began to enact representatives from entering Beginning in late 1999,

regulations that prohibit pharmaceutical sales

jurisdiction hospitals with the intent to promote pharmaceutical products to companies operating

physicians and pharmacists. Although the measures may be well intentioned, PhRMA in China believe that these policies are shortsighted, and do not of the physician and the patient in China.”

suﬃciently consider the long-term interest

The Chinese government’s recent enforcement actions resulted from the market irregularities mostly committed by domestic Chinese pharmaceutical companies, but have had serious negative impacts on the business of foreign pharmaceutical companies in China as well. Since the U.S. research-based pharmaceutical industry
FOR THE RECORD OF THE PHARMACEUTICAL RESEARCH AND MANUFACTURES OF AMERICA (PhRMA), SUBMITTED TO THE HOUSE WAYS AND MEANS COMMITTEE: THE FUTURE OF THE WORLD TRADE ORGANIZATION, April 13, 2000, at http://www.phrma.org. 3 SUMBISSION OF THE PHARMACEUTICAL RESEARCH AND MANUFACTURERS OF AMERICA (PhRMA) FOR THE NATIONAL TRADE ESTIMATE REPORT ON FOREIGN TRADE BARRIERS (NTE) 2002 (the “PhRMA NTE Submission”), December 17, 2001, at http://www.phrma.org.
2 STATEMENT

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has long employed the communications with prescribing physicians by sales representatives as an eﬀective and eﬃcient method of promotion and marketing, these enforcement actions may substantially reduce the U.S. pharmaceutical manufacturers’ competitiveness. The PhRMA report estimates: “[W e] are concerned that these rules diminish the role of the pharmaceutical sales signiﬁcantly impair the ability of pharmaceutical companies to: representative, and

• Ensure that prescribing physicians are fully informed on the proper use of medications.

• Obtain key information on the use and adverse events of launched products: not all adverse events can be monitored in post-marketing studies. Quite a number of adverse events come under the form of questions from the doctor to the sales r epresentative who report to the medical departments in the pharmaceutical companies.

•

Keep the physician informed on the latest advances and developments in key therapeutic ﬁelds.

• Obtain important feedback from physicians, pharmacists and hospital administrators on their personal development needs and interests.

The Chinese government’s enforcement actions are based on a roughly-drafted set of regulations targeting the corrupt practices in general commercial transactions, and other rules that are particularly applicable to the health care industry. In this article, these regulations are collectively termed as the “PRC antibribery law.” In the following sections of this article, we will examine the background for the Chinese government to initiate stringent scrutiny over the health care industry (Section II), and then analyze the pitfalls and loopholes of the

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PRC antibribery law (Section III) and its application to the U.S. pharmaceutical manufacturers’ promotional and marketing activities in China (Section IV). We will also brieﬂy discuss the guidelines provided by the American Medical Association (AMA) and the International Federation of Pharmaceutical Manufacturers Associations (IFPMA) which might be of some reference to U.S. companies’ China operations (Section V), and propose certain responding strategies for the industry and rules-changing suggestions for the regulator (Section VI).

II. BACKGROUND

China’s record in improving the health status of its population in a relatively short period of time is impressive.4 In urban areas, health insurance systems established in the 1950s covered most medical costs for employees and retirees of government agencies and state-owned enterprises, and their dependants. Some kind of comprehensive health insurance beneﬁts covered about 50 percent of urban residents. In rural areas, the rural cooperative medical system (CMS) was developed. This system required all commune members to contribute to a group medical fund, thus placing medical expenses on the commune rather than on an individual or a single family. Under this system, rural health stations delivered basic medical services, dispensed medications and provided partial reimbursement for services received at township and county hospitals. At its peak, the CMS covered 90 percent of the rural population.5
an indicator of progress, infant mortality rates were 200 per 1,000 live births in 1949 when the Communists took power, but had dropped to 33 per 1,000 by 1997. Average life expectancy was only 35 years in 1949, but had reached 70 by the 1990s. Most of this progress can be attributed to government investments in public health and preventive medicine, immunizations, hygiene and sanitation. See Christine Beasley, Health Care: The Sick Man of China, www.chinaonline.com, February 7, 2001. 5 Id.
4 As

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Even where they functioned best, however, neither the rural nor the urban systems of health care ﬁnancing and delivery were ideal by Western standards. There were problems of quality control, mismanagement and lack of ﬁscal accountability at various levels of both systems.6 Therefore, the reform of China’s health care system has long been a priority on the government’s agenda. Since 1990s, both the urban and rural medical insurance systems have undergone signiﬁcant changes. The government funds have gradually withdrawn from providing full medical coverage to government/state-owned enterprises employees and rural residents. The burden of medical coverage has become shifted from the government to the private parties (private employers and residents).7 The reform has unavoidably inﬂuenced the interests of virtually everyone, and thus aroused heated debates and complaints in many aspects. Over the recent years the cost of pharmaceutical products has been of particular concern. According to a 1998 report by the U.S. Foreign and Commercial Service, drug costs constitute 60% of health care spending in China, in contrast to 8% in the United States. Because the domestic pharmaceutical industry is characterized by low R&D investment and sluggish innovation, price competition has been the main battleground among suppliers. Hospitals, which dispense most medicines in China, have relied on the sale of drugs to patients and their leverage over suppliers to maximize their revenue.8 The roaring drug prices have seriously preventing many Chinese citizens from accessing to eﬀective and economic health care services. In response to this situation, the Chinese government started its eﬀorts in reducing the price of pharmaceutical products and eradicating abuses in connection with the sales and purchases of pharmaceutical products since the early 1990s. In 1994 a series of regulations and directives were issued by the central government with the intention of cleaning up corrupt practices in the health care industry. The government agencies involved in this endeavor
6 Id. 7 See, in general, the Decisions on the Reform and Development of the Health Care System, jointly issued by the Central Committee of the Chinese Communist Party and the State Council of the People’s Republic of China on January 15, 1997. 8 Lester Ross and Walter Hutchens, A Legislative Prescription for the Ills of the Drug Industry, China Law & Practice, Volume 15, No. 3 (April 2001), pp. 20-24.

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are the Oﬃce of Correction of Corrupt Industry Practices under the State Council,9 the State Development & Planning Commission,10 the State Economic & Trade Commission,11 the Ministry of Health,12 the State Administration of Industry & Commerce13 and the State Drug Administration.14 The government inspections since then have discovered that there were a lot of pharmaceutical companies, mostly domestic Chinese ones, engaging in corrupt practices in return for the sales of drugs.15 Despite government attempts to clamp down on these corrupt practices, however, the enforcement of antibribery law in the health care industry has not seemed to be satisfactorily successful; therefore renewed and reinvigorated attempts are being made to treat these ills.16

III. PRC ANTIBRIBERY LAW

Unfair Competition Law
9 The

State Council is the central government of the People’s Republic of China. The Oﬃce of Correction of Corrupt Industry Practices is a permanent inter-ministry agency directly under the State Council charged with inspection and correction of “corrupt industry practices” of a wide range of industries. It has the ministerial status within the government hierarchy. 10 The State Development & Planning Commission is one of the two most important “macro-controlling” departments under the State Council. Among its responsibilities is setting the price framework of the pharmaceutical products that are statutorily under the control of the government. 11 The State Economic & Trade Commission is the other most important “macro-controlling” department and has extensive responsibilities ranging from formulating industrial policies to regulating the market order. 12 The Ministry of Health is the top regulator of the health care industry and charged with the regulation of all hospitals and physicians in China. 13 The State Administration of Industry & Commerce is the government agency charged with, among other things, regulating fair trading, protecting consumer interests, and drafting legislation for commerce and industry. It is the major enforcement agency of the competition law. See detailed discussion below in Section III of this article. 14 The State Drug Administration is the top regulatory body of the pharmaceutical industry. It supervises the development, licensing, manufacturing, marketing and consumption of drugs, medical devices and biotechnology products in China. 15 See Circular on Further Strengthening the Administration on Pharmaceutical Products, issued by the State Council of the People’s Republic of China, September 29, 1994. Also see Circular on Continuing to Rectify and Regulate the Production and Marketing of Pharmaceutical Products and Strengthening the Administration issued by the State Counsel of the People’s Republic of China, April 16, 1996. These two “Circulars” brieﬂy summarized the periodic results of the government’s inspection and enforcement actions and requested further actions. 16 See 2001 Implementation Opinions on Correction of Corrupt Practices in Purchases and Sales of Pharmaceutical Products, jointly issued by the State Council’s Oﬃce of Correction of Corrupt Industry Practices, the State Development & Planning Commission, the State Economic & Trade Commission, the Ministry of Health, the State Administration of Industry & Commerce and the State Drug Administration on May 22, 2001. Also see the PhRMA NTE Submission, supra note 2.

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It was not until the early 1990s saw the introduction of the PRC Law Against Unfair Competition (the “Unfair Competition Law”).17 The Unfair Competition Law was enacted to “safeguard the healthy development of the socialist market economy” and to restrain “unfair competition.”18 It deﬁnes “unfair competition” as:

“Acts of business operators that, contravening the provisions of this Law, damage the lawful rights and interests of other business operators or disturb the social or economic order .” 19

When challenging the promotional and marketing practices of pharmaceutical manufacturers, the enforcement agencies generally claim that such practices are in violation of the provisions pertinent to “commercial bribery” contained in the Unfair Competition Law. Commercial bribery, as one of the “unfair competition practices” enumerated by the Unfair Competition Law, is loosely deﬁned as:

“The use of valuables or other means by a busi ness operator to bribe the other transaction party in order to secure the sale or purchase of goods.”
20

The pitfalls in this wording are immediately apparent, for example, the circular use of “bribe” to deﬁne bribery. It is also unclear about the meanings of “valuables” and “other means” employed to bribe.

The Unfair Competition Law authorizes the State Administration of Industry and Commerce (SAIC) as the
17 Promulgated by the 8th Standing Committee of the PRC National People’s Congress on September 2, 1993 and eﬀective as of December 1, 1993. 18 Unfair Competition Law, art.1.

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enforcement agency of the law.21 The Fair Trading Bureau of the SAIC applies the Unfair Competition Law by means of administrative enforcement measures available to the SAIC under administrative procedural law.22 The SAIC may investigate irregularities or violations of the law on its own initiative, or it can respond to complaints received from outside parties.23 To implement Article 8 the Unfair Competition Law, the SAIC issued the Provisions on Prohibition of Commercial Bribery on November 15, 1996 (the “SAIC Commercial Bribery Provisions”). It was made clear in the SAIC Commercial Bribery Provisions that “valuables,” as used in Article 8 of the Unfair Competition Law, refers to any valuables “in cash or in kind, including payments under the guise of promotion, advertisement, sponsorship, grants for scientiﬁc research, service fees, consulting fees or commissions, as well as the reimbursement of various expenses.”24 The “other means” used in Article 8 of the Unfair Competition Law refers to “provision of beneﬁts other than valuables in cash and in kind,” such as oﬀer of all expenses-paid vacations within China and overseas, etc.25

Article 8 of the Unfair Competition Law also deals with kickbacks and draws a line between kickbacks and other legitimate business incentive arrangements such as rebates and commissions. The law reads:
Competition Law, art.3. PRC Law on Administrative Punishment was promulgated by the PRC National People’s Congress on March 17, 1996 and became eﬀective as of October 1, 1996 (the “Administrative Punishment Law”). Article 8 of the Administrative Punishment Law deﬁnes the diﬀerent categories of administrative punishment as being: 1) Warnings; 2) Fines; 3) Conﬁscation of illegal income or illegal assets; 4) Order to cease production and business; 5) Suspension or cancellation of permit or license; 6) Administrative detention (only can be enforced by the Police Department); and 7) Other administrative punishments speciﬁed by laws and regulations. 23 Unfair Competition Law, arts.16, 4. 24 The SAIC Commercial Bribery Provisions, art.2. 25 Id.
22 The 21 Unfair

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“Any kickbacks provided oﬀ-the-book and covertly to the other transaction party or its individual employee shall be treated as oﬀer of bribes. The acceptance by the other transaction party or its individual employee of the kickbacks oﬀ-the-book and covertly shall be treated as the acceptance of bribes. A business operator may, in an express manner , provide rebates to the other transaction party in the sales and purchases, and provide commissions to the middleman. The rebates provided to the other transaction party and the commissions provided to the middleman must be truthfully recorded on the books by the business operator . The recipient of the rebates or commissions shall truthfull y record on its book the rebates and commissions.”
26

Here the law sets two parameters to characterize a payment as kickback: “oﬀ-the-book” and “covertly” provided. The diﬀerent between kickbacks and rebates or commissions is whether they are duly recorded on the books of both the provider and the recipient. It should be noted, however, that these two parameters are only applicable to kickbacks. In other words, if an action falls into the category of bribery stipulated by the ﬁrst sentence of Article 8 (“ The use of valuables or other means by a business operator to bribe the other transaction party in order to secure the sale or purchase of goods”), there is no requirement for it being provided oﬀ-the-book and covertly. Article 22 of the Unfair Competition Law provides that the SAIC may impose two types of administrative sanctions on any violations of Article 8 that do not constitute a crime: (1) a ﬁne in the amount of RMB10,000 to RMB200,000 (approximately US$1,200 to US$24,000, and/or (2) conﬁscation of any illegal gains generated from the bribing practices.27

27 Unfair

Competition Law, art.22.

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Drug Administration Law

Another set of antibribery rules applicable to the pharmaceutical industry is contained in the PRC Law on Drug Administratio which was originally enacted in 1984. On February 28, 2001 the Standing Committee of the PRC National People’s Congress signiﬁcantly amended the law (the PRC Law on Drug Administration, as amended, is hereinafter referred to as the “Drug Administration Law”). The Drug Administration Law strengthens the legislative foundation over pharmaceutical regulations, including approvals, manufacturing, storage, packaging, prescriptions, advertising and pricing. Several changes merely codify, at the legislative level, what had already been implemented through administrative regulations or in practice. The Drug Administration Law, which has become eﬀective as of December 1, 2001, is applicable to foreign-invested pharmaceutical companies and foreign market participants even though domestic issues within the PRC pharmaceutical industry and its evolving regulatory system largely drive the amendments.28

The core provision of the Drug Administration Law against corrupt practices in sales and purchases of pharmaceutical products is contained in Article 59. The ﬁrst paragraph of Article 59 prohibits the payment of “kickbacks” or “other material beneﬁts” in drug sales and purchases:
28 Lester

Ross and Walter Hutchens, supra note 7.

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“Pharmaceutical manufacturers, pharmaceutical dealers and medical institutions are prohibited from oﬀering or accepting kickbacks or other material beneﬁts oﬀ-the-book and covertly in the sales and purchases of pharmaceutical products.”29

There is not express deﬁnition of “kickbacks” and “other material beneﬁts,” but two parameters are indicated here: “oﬀ-the-book” and “covertly,” which are same as the provision of Article 8 of the Unfair Competition Law.

The wording of the second paragraph of Article 59 is more problematic:

“Pharmaceutical manufacturers, pharmaceutical dealers or their agents are prohibited from offering any valuables or other material beneﬁts under any guise to the responsible personnel, drug purchasers or physicians of the medical institutions that use their pharmaceutical products. The responsible personnel, drug purchasers or physicians of a medical institution are prohibited form accepting any valuables or other material beneﬁts under any guise provided by pharmaceutical manufacturers, pharmaceutical dealers or their agents.”30

The distinction between the ﬁrst and the second paragraphs of Article 59 appears to be that the ﬁrst attempts to attack the kickbacks provided oﬀ-the-book and covertly (as opposed to legitimate rebates and commissions) whereas the second is directed at “commercial bribery.” Similar with the relevant provisions of the Unfair Competition Law, under the Drug Administration Law, the commercial bribes are not necessarily provided oﬀ-the-book and covertly.

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Articles 9031 and 9132 of the Drug Administration Law deal principally with discipline and punishment of violations of Article 59, including among others the providers and recipients of proscribed beneﬁts. The antibribery provisions of the Drug Administration Law are also primarily enforced by the SAIC and its local branches, with the assistance of the departments of drug administration in case of need.33

Ambiguity of Law and Confusion in Practice

The PRC antibribery law applicable to the pharmaceutical industry, as above analyzed, is ambiguous in many aspects, and thus results in broad and discretionary interpretations by enforcement agencies and puts the pharmaceutical manufacturers in a continuing conundrum. On the one hand, pharmaceutical manufacturers – who, after all, are in the business of selling their products for maximum proﬁt – are pushed by the economics of the evolving health care market to develop data showing that their products are cost-eﬀective, and by competitive pressures to sell more of those products than the alternatives made by their competitors. On
90 of the Drug Adminstration Law reads in its entirety as follows: “The pharmaceutical manufacturers, pharmaceutical dealers and medical institutions which oﬀer or accept kickbacks or other material beneﬁts oﬀ-the-book and covertly in the sales and purchases of pharmaceutical products, and the pharmaceutical manufactures, pharmaceutical dealers or their agents which oﬀer any valuables or other material beneﬁts to the responsible personnel, drug purchasers, physicians or other relevant persons of the medical institutions that use their pharmaceutical products, shall be punished by the department of administration of industry and commerce by (1) imposing a ﬁne in the amount of RMB10,000 up to RMB200,000; and/or (2) conﬁscating illegal gains if any; and/or (3) canceling the business licenses of the pharmaceutical manufactures or dealers, and requesting the department of drug administration cancel their [special] licenses for pharmaceutical manufacturing and dealing. If the violations are serious enough to constitute a crime, the criminal charges shall be initiated.” 32 The second paragraph of Article 91 of the Drug Administration Law reads in its entirety as follows: “The responsible personnel, drug purchasers, physicians or other relevant persons of the medical institutions who receive valuables or other material beneﬁts provided by pharmaceutical manufacturers, pharmaceutical dealers or their agents shall be imposed upon administrative sanctions by the departments of health or the medical institutions of these persons, and conﬁscated illegal gains if any. The physicians who committed serious violations shall be disqualiﬁed as practicing physician by the departments of health. If the violations are serious enough to constitute a crime, the criminal charges shall be initiated.” 33 Drug Administration Law, arts.90 and 91.
31 Article

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the other hand, manufacturers have little real guidance from legal authorities as to when pursuit of these ends through ﬁnancial arrangements or other communications with their customers – many of which would be both common and lawful outside the health care industry, and many of which actually may be beneﬁcial to the health care professionals and, ultimately, the patients – will be treated as unlawful bribing practices.34

Speciﬁcally, the lack of clear deﬁnition of “commercial bribery” under the Unfair Competition Law (Article 8, and the relevant articles of the SAIC Commercial Bribery Provisions) and the extremely broad prohibition of “beneﬁts” under the Drug Administration Law (Articles 59, 90 and 91) have created a climate that could inhibit normal and genuine promotional activities of pharmaceutical companies, including those that provide educational beneﬁts to Chinese health care professionals and thereby assist in the development of China’s health care system. It is of great concern to the PhRMA members as they stated in the recent national trade estimate report.35

This is not a hypothetical concern. In the recent past some members of the PhRMA have been investigated by local Government agencies in China ostensibly applying rules against “commercial bribery” under the Unfair Competition Law. In such cases a recurring issue has been where to draw the line between marketing irregularities that could constitute unlawful “commercial bribery” and, for example, lawful bona ﬁde sponsorship of the attendance by health care professionals at educational symposia.36
dilemma is also found in other countries including the U.S. See commentary made by Thomas N. Bulleit, Jr. and Joan H. Krause, Kickbacks, Courtesies, or Cost-Eﬀectiveness?: Application of Medicare Antikickback Law to the Marketing and Promotional Practices of Drug and Medical Device Manufacturers, 54 Food & Drug L.J. 279 (1999). 35 See the PhRMA NTE Submission, supra note 2. 36 Id.
34 Such

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IV. ILLUSTRATION OF INDUSTRY PRACTICES UNDER ATTACK

The PRC antibribery law leaves broad room for the government’s enforcement agencies to apply it to a wide range of industry practices such as gifts and sponsorships for scientiﬁc and educational activities, payments for services (such as clinical studies), discounts other incentive arrangements, and so forth. These promotional practices are well-established and commonly employed by pharmaceutical manufacturers in the U.S. In the meantime, even in the domestic U.S. market, these practices are subject to very strict scrutiny by federal agencies (such as the Department of Health and Human Services’s Oﬃce of Inspector General), and subject to self-disciplinary rules set forth by professional associations (such as American Medical Association) to prevent any abuse. In fact, while relationship between the pharmaceutical industry and the medical community has resulted in important beneﬁts for patient care, there has been for a long time concern about the potential negative consequences of the relationship. As early as in the 1970s, following Congressional hearings on unprofessional drug promotion practices, “Examination of the Pharmaceutical Industry, 1973-74,” Hearing before the Subcomm. on Health of the Senate Comm. on Labor and Public Welfare, 93rd Cong., 1st & 2nd Sess., Pt. 3(1974), the Pharmaceutical Manufacturers Association endorsed federal legislation to eliminate such practices as giving gifts to physicians to encourage them to prescribe speciﬁc drugs. “PMA’s Positive Program,” 36 FDC Reports (“The Pink Sheet”), no. 14, at A1 (April 8, 1974). Criticism of pharmaceutical promotional practices has not abated, however.37

37 PETER

B. HUTT & RICHARD A. MERRILL, FOOD AND DRUG LAW, 2nd Ed., 458-459 (2001).

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Gifts & Sponsorships for Educational/Scientiﬁc Activities

On of the major promotional practices in question is gift-giving to physicians by pharmaceutical companies. Included in this category are personal gifts (e.g., lunches or dinners, or tickets to recreational or entertainment events), gifts that aid the physician or other health care provider in his or her practice (e.g., pens, calendars, or medical textbooks), and gifts that arguably have features of both (e.g., grants to subsidize the costs of professional education of physicians).38 Many gifts serve an important and socially beneﬁcial function; some gifts, however, may have inappropriate eﬀects and are therefore vulnerable to attack. Pharmaceutical companies are also active in sponsoring medical conferences that have been developed by hospitals, medical schools or professional associations. Their sponsorship often takes the form of a speaker, general support, or speciﬁc underwriting grants and includes hospitality suites, dinners, and cash payments to registrants to defray the costs of attending the conference. In some cases, companies will pay the full costs for a physician to attend a conference in another city or another country and oﬀer to pay for additional days of vacation at the conference site. Some companies put on conferences with speakers who are selected by the company and who discuss the company’s products. These conferences are typically held at attractive locations, and some physicians are ﬂown in with their spouses for a weekend of presentations, recreation, and entertainment, all at company expense. Often, a company will direct its invitations at physicians who are viewed as leading practitioners by other physicians in their community. The companies recognize that practices adopted by these “leaders” are generally followed by their peers. Companies schedule individual speakers to speak to groups of physicians over dinner at no cost to the physicians, and some companies will
38 Thomas

N. Bulleit, Jr. and Joan H. Krause, supra note 33.

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make cash payment to each physician who attends the dinner to compensate for the physician’s time.39 Gifts and sponsorships are at once the easiest and most diﬃcult to analyze under the antibribery law. In one sense, it is easy to analyze this category under the antibribery law: because these items have economic value, plainly are intended to encourage the customer to give favorable consideration to purchasing the giver’s product, they arguably would seem to violate the letter of the law. It is worthy noting that the PRC antibribery law as well as the implementation opinions issued by the relevant government agencies speciﬁcally render unlawful any payments to physicians from industry under the guise of “promotion and sponsorship.”40 On the other hand, however, the description of this category also indicates the diﬃculty with the area of gifts and sponsorships; obviously, long-standing sales and marketing custom both inside and outside the health care industry encourages companies to be “nice” to their customers, and surely it cannot be the case that every beneﬁt described above is rendered unlawful by the antibribery law. Indeed, some gifts and gratuities, such as textbooks or meals with sales representatives, may beneﬁt patient care by giving physicians the opportunity to learn more about a product and its uses.41 Furthermore, the sponsorships for scientiﬁc and educational activities provided to the medical professionals by the pharmaceutical industry are undisputedly beneﬁcial to the development of the medical profession and therefore good to the society as a whole provided that they serve the genuine scientiﬁc and educational purposes.

Payment for Services
Council on Ethical and Judicial Aﬀairs of the American Medical Association, Guidelines on Gifts to Physicians From Industry: An Update, 56 Food & Drug L.J. 27 (2001). 40 The SAIC Commercial Bribery Provisions, art.2. Also see the 1994 and 1996 Circulars issued by the State Council, supra note 14, and the 2001 Opinions issued by the six government departments, supra note 15. Also see Implementation Opinions on Strict Enforcement Actions Against Corrupt Practices in Purchases and Sales of Pharmaceutical Products, issued by the Ministry of Health on June 1, 1999. 41 Thomas N. Bulleit, Jr. and Joan H. Krause, supra note 33.
39 The

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Another more controversial category of promotional practices is payment to medical professionals for their services. In general, there are a large number of common arrangements in the health care industry pursuant to which persons in a position to make prescription or purchase decisions also might be hired to perform services for the manufacturer. Most obviously, physicians, who can prescribe the company’s products, often also are hired to carry out clinical studies for the company. It also is increasingly common for payments to be made to purchase data concerning use of the company’s products by the physician’s patients. Moreover, doctors and others are paid for serving as consultants and members of scientiﬁc or medical advisory boards, for attending focus groups, and performing professional speaking and writing on behalf of the company. In parts of the medical device industry, it also is common for physicians to serve as preceptors to other physicians, demonstrating techniques for appropriate use of certain medical devices. All of these practices raise issues under the antibribery law when the person is paid, whether a physician, pharmacist, hospital purchasing manager, or other, is in a position to inﬂuence the purchase of the manufacturers’ products.42 There is the possibility that some such arrangements may be “shams,” paying for services that are not needed or are not actually provided; or that although legitimate services actually are provided, the structure or amount of the compensation is such as to provide an inducement to prescribe or purchase the company’s products. In fact, many services arrangements between pharmaceutical companies and prescribing physicians or purchasing medical institutions have been rendered unlawful by the Chinese government agencies based upon the above reasoning. The PRC antibribery law and the relevant ministerial implementation opinions do provide the legislative and administrative sources for these enforcement actions.43
42 See the introductory description of the general practices in the U.S. market in Thomas N. Bulleit, Jr. and Joan H. Krause, supra note 33. 43 See supra note 39.

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Discount & Other Incentives

One of the most problematic and complained marketing practices engaged in by some pharmaceutical companies in China is making bold cash payment to physicians or pharmacists conditional on their prescription or purchase of the company products. In China, such obviously inappropriate payments are colloquially called “prescription fees” or “entrance fees,” and as a matter of practice are usually paid under the guise of “discounts” or “rebates.”44 Discount and other incentives such as rebates obviously are not illegal per se in the commercial world. The pharmaceutical industry is also not excluded by law from engaging in these business practices when dealing with its customers (i.e., the purchasing hospitals). The major problem associated with this kind of business practices is that if the discounts or incentives are properly reported, and if they are speciﬁcally designed to unduly inﬂuence the recipients’ prescribing and purchasing practices. The PRC antibribery regulations outlaw any payment to physicians or pharmacists made by pharmaceutical manufacturers “oﬀ-the-book and covertly.”45 The appropriateness of discounts and other incentives are also dependent on whether they are provided in a manner that may induce the prescribing physicians or purchasing medical institutions to overuse or even misuse the company products at the cost of the patients.46

44 Id. 45 See 46 The

the detailed discussion on the PRC antibribery law in Section III above. Ministry of Health, Implementation Opinions, 1999, supra note 39.

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V. THE AMA GUIDELINES AND THE IFPMA CODE

The lack of clarity of the PRC antibribery law and the likelihood of its discretionary application by the enforcement agencies require the industry take various curative actions for a less confusing and more predictable regulatory environment in which they promote their products. The established ethical rules of the medical profession and the pharmaceutical industry, both at the national and the international level, may serve as good guidelines for company conduct, safe harbors from the attack of the antibribery law, and persuasive reference for the industry’s lobbying eﬀorts towards the Chinese government. Among these ethical rules the American Medical Association (AMA)’s Guidelines on Gifts to Physicians from Industry and the International Federation of Pharmaceutical Manufacturers Associations (IFPMA)’s Code of Pharmaceutical Marketing Practices are of the most importance and relevance.

AMA Guidelines

In December 1990, the American Medical Association’s House of Delegates adopted the Guidelines on Gifts to Physicians from (the “AMA Guidelines”), which ﬁrst appeared in the Code of Medical Ethics in 1992. Over the years, the AMA’s Council on Ethical and Judicial Aﬀairs has continued to provide speciﬁc answers to requests for

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clariﬁcation. The purpose of the AMA Guidelines is to provide a sound framework to minimize conﬂict of interests and to prevent the integrity and trust in the patient/physician relationship from being compromised by promotional or marketing activities.47 The AMA Guidelines believes that even when gifts from industry have no eﬀect on a physician’s practices, there may be a public impression of impropriety, especially if the gifts are of substantial value. The trust of the public that physicians are dedicated foremost to the welfare of their patients may be undermined when there is a possibility that the choice of a drug, device or other product is inﬂuenced by the fact that the physician had received a gift from the company that manufactures the product. For example, when companies schedule their own conferences at resorts and pay for physicians and their spouses to attend for a weekend that includes only a few hours of lectures and many hours of recreation, lavish meals and expensive entertainment, it is diﬃcult to view the conference as serving a legitimate educational purpose.48 The costs of gifts from industry to physicians are ultimately passed on to the public. In eﬀect, then, patients may be paying for a beneﬁt that in some cases is captured primarily by their physicians. Physicians should not accept inappropriate gifts because the cost is ultimately subsidized by patients.49 The AMA Guidelines also recognizes that many gifts from industry to physicians result in signiﬁcant beneﬁts to patients. For example, books and conferences contribute to the education of physicians, and meals at medical meetings or conferences provide a forum for colleagues to exchange information. These kinds of gifts can therefore be appropriate, depending on the extent to which the gift serves a function beneﬁcial to patient care and on whether the same beneﬁts can be realized through less costly promotional activities.50 Speciﬁcally, the AMA Guidelines state:51

47 See 48 Id. 49 Id. 50 Id. 51 Id.

AMA Council on Ethical and Judicial Aﬀairs, supra note 38.

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1. Any gifts accepted by physicians individually should primarily entail a beneﬁt to patients and should not be of substantial value. Accordingly, textbooks, modest meals, and other gifts are appropriate if they serve a genuine educational function. Cash payments should not be accepted.

2. Individual gifts of minimal value are permissible as long as the gifts are related to the physician’s work (e.g., pens and notepads).

3. Subsidies to underwrite the costs of continuing medical education conferences or professional meetings can contribute to the improvement of patient care and therefore are permissible. Since the giving of a subsidy directly to a physician by a company’s sales representative may create a relationship which could inﬂuence the use of the company’s products, any subsidy should be accepted by the conference’s sponsor who in turn can use the money to reduce the conference’s registration fee. Payments to defray the costs of a conference should not be accepted directly from the company by the physicians attending the conference.

4. Subsidies from industry should not be accepted directly or indirectly to pay for the costs of travel, lodging or other personal expenses of physicians attending conferences or meetings, nor should subsidies be accepted to compensate for the physicians’ time. Subsidies for hospitality should not be accepted outside of modest meals or social events held as part of a conference or meeting. It is appropriate for faculty at conferences or meetings to accept reimbursement for reasonable travel, lodging and meal expenses. It is also appropriate for consultants who provide genuine services to receive reasonable compensation and to accept reimbursement for reasonable travel, lodging and meal expenses. Token consulting or advisory arrangements cannot be used to justify compensating physicians for their time or their travel, lodging and other out-ofpocket expenses.

5. Scholarships or other special funds to permit medical students, residents and fellows to attend carefully selected educational conferences may be permissible as long as the selection of students, residents or fellows who will receive the funds is made by the academic or training institution.

6.

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No gifts should be accepted if there are strings attached. For example, physicians should not accept gifts if they are given in relation to the physicians’ prescribing practices. In addition, when companies underwrite medical conferences or lectures other than their own, responsibility for and control over the selection of content, faculty, educational methods and materials should belong to the organizers of the conferences or lectures.

IFPMA Code

At the international level, the International Federation of Pharmaceutical Manufacturers Associations (“IFPMA”)52 adopted the Code of Pharmaceutical Marketing Practices (the “IFPMA Code”) in 1981. A major revision of the IFPMA Code took place in 1994, recognizing the many changes in the market environment. The IFPMA Code, summarizing the rules of conduct generally accepted by the industry worldwide, can serve as another important set of guidelines for the U.S. drug manufacturers promoting their products in China. In the meanwhile, the principles and speciﬁc provisions of the IFPMA Code may be more acceptable by the Chinese government as a reference when drafting the supplementary legislation to the current antibribery law. The IFPMA Code acknowledges that the promotion of prescription medicines to health care professionals
52 IFPMA was created in 1968 as a non-proﬁt, non-governmental organization (NGO) and has since achieved consultative status with many United Nations and other international organizations. The IFPMA was admitted into oﬃcial relations with the World Health Organization (WHO) in 1971 and is also on the NGO roster for the World Intellectual Property Organization (WIPO), the United Nations Conference on Trade and Development (UNCTAD), the United Nations Industrial Development Organization (UNIDO), the United Nations Economic and Social Council (ECOSOC), the United Nations Children’s Fund (UNICEF) and the Council of Europe. The members of IFPMA are regional and national associations representing researchbased pharmaceutical companies and other manufacturers of prescription medicines. The PhRMA is a member of the IFPMA representing the U.S. research-based pharmaceutical industry. See more information about the IFPMA from its oﬃcial website at http://www.ifpma.org.

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is a vital extension of the process of searching for and developing new and better means of preventing and treating illness. Promotion and the dissemination of educational information ensures that the full beneﬁts of the years of work and enormous expenditure of skill and money will be made available promptly to the patients of the world. The voluntary adoption of the IFPMA Code in 1981 was in accordance with a key objective of the IFPMA as set out by its Founder Members in 1968 in the Statutes (Article 3) which state that one of the objects of the IFPMA is “to promote and support continuous development throughout the pharmaceutical industry of ethical principles and practices voluntarily agreed on” and “to coordinate the eﬀorts of its members towards the realization of the above objects.”53 The IFPMA Code is intended to deﬁne universally applicable baseline standards of marketing practices. A substantial proportion of the 51 member associations of IFPMA have their own Code of Practice. Some are based on the IFPMA Code, but elaborated to recognize national circumstances and conditions, while others are derived from versions which existed even before the IFPMA Code was ﬁrst introduced. All, however, fully embody the principles set out in the IFPMA Code. Companies within membership of IFPMA Member Associations are also encouraged to formulate their own codes that may include more speciﬁc requirements and additional rules that must be observed by their own employees in conducting their own promotional activities.54 Sections III and IV of the IFPMA Code, dealing with “symposia, congresses and other means of verbal communication” and “hospitality and promotional items” respectively, are of most relevance to this article. The IFPMA Code recognizes that symposia, congresses and the like are indispensable for the dissemination of knowledge and experience, and provides the following safe harbor rules for pharmaceutical companies to engage in such activities:55

53 IFPMA 54 Id. 55 IFPMA

Code: Introduction. Code: Section III.

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1. Objectives: scientiﬁc objectives should be the principal focus in arranging such meetings and entertainment and other hospitality shall not be inconsistent with such objectives.

2. Sponsorship: When a pharmaceutical company or association sponsors a symposium, congress or other medical/health care or educational program:

• The fact of sponsorship by the company or association should be clearly stated in advance, at the meeting and in any proceedings. Printed, audio-visual or computer-based material arising from such meetings should accurately reﬂect the presentations and discussions.

• Entertainment or other hospitality and any gifts oﬀered to members of the medical and allied professions should be secondary to the main purpose of the meeting and should be kept to a modest level.

• Any support to individual health practitioners to participate should not be conditional upon any obligation to promote any medicinal product.

• If the program is accredited for postgraduate medical education by a medical or other professional organization, responsibility for the program content remains with the organization responsible for obtaining accreditation for the meeting, and industry support should be disclosed.

• Payments of reasonable honoraria and reimbursement of out-of-pocket expenses, including travel, for speakers/presenters are customary and

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proper.

• Companies should not pay travel costs of persons accompanying invited members of the medical and allied professions.

The IFPMA Code generally prohibits inappropriate beneﬁts provided to health care professionals, but exempts promotional items of insigniﬁcant value and educational materials from the general prohibition. Speciﬁcally, Section IV.1 provides that inappropriate ﬁnancial or material beneﬁts, including inappropriate hospitality, should not be oﬀered to health care professionals to inﬂuence them in the prescription of pharmaceutical products.56 Making hospitality or other beneﬁts conditional upon past prescribing performance is also precluded.57 Section IV. 2 provides that promotional items of insigniﬁcant value, provided free of charge, are permissible as long as they are related to the health care provider’s work and/or entail a beneﬁt to patients.58 Section IV. 3 further provides that textbooks or reference books/information, and other educational material may be given to health care providers if they serve a genuine educational function.59

VI. CONCLUSION

56 IFPMA 57 IFPMA

Code, Code, 58 IFPMA Code, 59 IFPMA Code,

Section IV.1. Explanatory Note to Section IV.1. Section IV.2. Section IV.3.

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Given the facts that the health care industry of China is still under dramatic reform and restructuring, and that the PRC antibribery law and the enforcement actions taken by the government agencies are still of the developing character, in the short run the disorder and unpredictability of China’s pharmaceutical market and the regulatory regime will remain. To fully tap the attractive market potentials while avoid or minimize undesirable government interruptions, the U.S. pharmaceutical manufacturers should consider designing and implementing more eﬀective and country-speciﬁc corporate policies governing their promotional and marketing practices in China; in the meantime, continuing the lobbying eﬀorts to urge the Chinese government to clarify the existing regulation and set forth more safe harbors to accommodate the industry’s concerns. With respect to the provision of gifts and sponsorships from the industry to medical professionals, the cautious guidelines set forth by the AMA Guidelines and IFPMA Code should be observed. In essence, the value of the gifts and sponsorships must be appropriate and consistent with the genuine scientiﬁc and/or educational purposes, and any linkage between the provision of gifts/sponsorships and the prescribing/purchasing practices must be carefully avoided. With respect to the payment to medical professionals for services, pharmaceutical companies should demonstrate that they do have a legitimate need for the services of the physician consultant or advisor. The best evidence of such a need probably is that the company considers and acts (either favorably or unfavorably) on the recommendations of its physician consultants. Another issue should be noted is whether the physician consultants are compensated an amount that fairly reﬂects the value of a service that contemporaneous documentation shows they actually provided.60

60 Thomas

N. Bulleit, Jr. and Joan H. Krause, supra note 33.

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With respect to the discounts and other incentive arrangements, the single most important guideline is to strictly abide by the relevant accounting principles and rules and have all of these arrangements duly recorded on the company’s accounting books. As previously analyzed, the dividing line between lawful “discounts” and unlawful “kickbacks” is that whether they are provided “oﬀ-the-book and covertly,”61 thus good bookkeeping practice and the maintenance of an easily-checkable “paper trail” of these arrangements are highly recommendable. The U.S. pharmaceutical industry has also started to, and should continue to, engage in lobbying activities to persuade the Chinese government to change or reﬁne the relevant rules. The PhRMA has come up with and publicized a set of detailed suggestions for substantiate and clarify the vague provisions contained in the Drug Administration Law.62 In order to address the industry’s concern about the potential for controversy about the intent of Articles 59, 90 and 91 of the Drug Administration Law, the PhRMA suggest that the implementation rules supplementing to the Drug Administration Law63 specify as clearly as possible what conduct remains permissible. With respect to the “valuables or other material beneﬁts” used in the second paragraph of Article 59 and the corresponding sentences of Articles 90 and 91, the PhRMA argues that the objective of the law could be achieved with minimal disruption of bona ﬁde promotional activities if the implementing rules were to make clear that the prohibition on the provision or acceptance of beneﬁts refers to “inappropriate beneﬁts provided to inﬂuence the recipients in the purchase or prescription of pharmaceutical products of the providers,” following the lines of the IFPMA Code and legislative norms of some other countries.64

the detailed discussion in Section III above. the PhRMA NTE Submission, supra note 2. 63 The Implementation Rules for the Drug Administration Law are under the amendment process to be consistent with the recent amendments to the Drug Administration Law. The agencies charged with the drafting work are the State Drug Administration and the State Council’s Oﬃce of Legal Aﬀaires. 64 Id.
62 See

61 See

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The PhRMA also suggests setting forth speciﬁc exemptions from the attack of Articles 59, 90 and 91 of the Drug Administration Law, which providers and recipients of beneﬁts could readily understand. For example, the new implementing rules might expressly provide that Articles 59, 90 and 91 do not prohibit the sponsorship of attendance by health care professionals at symposia, conferences, congresses, seminars or other similar research-oriented or educational programs, publication of scientiﬁc papers and the provision of promotional items of insigniﬁcant value and educational materials.65 PhRMA proposes that a speciﬁc exemption along the lines of the foregoing could be made even more precise by providing that permissible sponsorships and materials are those that are (a) genuine in terms of purpose; (b) not intended to induce any pharmaceutical purchase and prescription activity, (c) appropriate to the expertise of the sponsored personnel and disclosed in writing to the responsible persons within the unit of the sponsored personnel, (d) reasonable in amount to the extent of that required by the scientiﬁc and educational purposes, and (e) properly accounted for in the books and records of the sponsor.66

65 Id. 66 Id.

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