On Dec 24th, 2016, physicians from six 3rd class public hospitals in Shanghai and Hunan were filmed by CCTV taking bribes from pharmaceutical sales representatives. It was said that the CCTV journalist spent 8 months collecting the facts and found that nearly 40% of the drug prices paid by consumers within the hospital was kickbacked to the physician. The summary of the report did not mince words: ”Over-priced drugs damage the core value of public hospitals on serving for public … [the] profit-driven mechanism in public hospitals hurts the public’s satisfaction from increases [in] universal healthcare insurance.”
Physicians’ taking bribes by prescriptions or “drug kickbacks” is not new in China. Actually, it has a long history since the 1990s. As early as 1996, Dr. Zhang Xu from Anhui 1st Remin hospital wrote a letter to the Anhui healthcare bureau reporting on the drug kickback behavior among doctors in public hospitals. In 2001, Xinhua News published a series report on the investigation of the drug distribution channel reform, which pointed out the problems on over-priced drugs and the extent of the drug kickback problem in public hospitals. In 2006, Xinhua News published a report that outlined “a shocking list of drug kickback from a poverty county ” to expose the popular “red envelope” phenomenon in county level public hospitals. Now we have the newest one by CCTV, all which are going to further attract more concern from the public and the government’s attention given what CCTV described as, “the incurable systematic disease in public hospitals.” If multinational pharmaceutical companies think the GSK-type crackdowns are a thing of the past, they are wrong, if for no other reason than the government’s continued political exposure to the problems of kickbacks within their own hospitals.
From the voices of patients, government, pharmaceutical companies, physicians, all of them say NO to drug kickback because it breaks the normal ecosystem of the pharma market because it worsens the problem of “Kanbinggui” and the lack of trust between patients and doctors, it increases the burden of basic medical insurance the government must fund, it prevents the development of domestic pharmaceutical innovation by inhibiting creative and research endeavors in favor of short term thinking around prescription spiffing, and brings shame and professional risks for physicians. However, with 20 years past since these problems first became obvious to the public and government, and although the government administration departments have launched multiple specific activities to clear up the behavior, drug kickback does not disappear or weaken, but instead has grown more extensive. Why? From Rubicon’s research, drug kickbacks are the inevitable product of combined drug sales and medical services in China market, which is dominated by the public hospitals. And we should be clear that Chinese public hospitals should be called State Owned Enterprises (SOE) hospitals, because all of them are operated through profit driven mechanisms instead of being driven by social benefits. This disconnect is not lost on the Chinese public, nor its government who recognizes this remains a pervasive and profound political problem.
China’s public hospitals dominate the whole medical service market and rely on drug sales to exist and develop. From 2014 data, public sector provided 89.0% outpatient services and 87.2% in -hospital services in China mainland. Among public sector, 3rd class provided 51.3% services and 2nd class provided 42.1%. It is not difficult to see the big hospitals (3rd and 2nd class hospitals) in cities are still the major players in China market. When a market lacks competition, in theory, the price of the dominating service provider should be high. However, as we know, China government controls the medical service fee forcing it down to a distorted low price. What this means is that all the public hospitals have excuses and are actually driven to earn revenue from drug sales to maintain their daily operation. For the government, drug sales to subsidize hospital operation has been recognized as an acceptable solution because of the shortage of government funding.
Physicians in public hospitals also rely on the drug kickback to make their income reach a reasonable level because their salary of is also controlled by government and is set to a very low level. Although the job entry requirement is high, and although there is extensive professional risk and heavy work load, a Chinese physician’s salary is no higher than the average social servants’ salary, which is 3 or 4 times of average social servant’s salary in many other countries. We still are not seeing as many physicians leave public hospitals as one might think, in large part because the drug kickback does provide physicians a considerable resource that makes them income. We also noticed that, different from US, Chinese have a kind of high tolerance on the drug kickback that few people think it is a guilt and no law to prohibit the behavior.
Public hospitals are happy to live with high price drugs because of the 15% drug mark-up income and also the revenue which can cover all the cost of rent-seeking behavior in the value chain. In CCTV’s report, the price of drug in the hospital is 3 to 10 times high as the first level wholesale. How did this happen? First, the powerful Drug Tendering Board is a key group that decides the tendering price of a drug in their province. The expert members of the board are managers and pharmacist from the big public hospitals. Second, the hospital managers decide the actual purchase price. All the key drug price decision makers belong to the public hospitals, and there no reason to doubt their willingness to do anything against the benefit of the system they belong to.
The last and the most important issue that makes this all worse is the basic medical insurance (BMI) that is strengthening the power of public hospitals, especially the big ones. In the previous 20 years, China has achieved a universal health coverage via the BMI system. In 2014, the total BMI spending is 135.25 Billion RMB. The big amount of spending was reimbursed for all public hospitals and 30% of private hospitals. If we think about the service volume, 95% BMI spending went to the public hospitals. The hospitals, especially the big hospitals in big cities, became the biggest winner by taking the benefit from the expanding universal medical insurance. A staff in BMI administration institute used to complain to me that the Yibao actually had weak supervision power on the big public hospitals because these big hospitals had strong bargaining power to push other stakeholders to follow their rules.
CCTV is always regarded as the representative speaker of central government. The drug kickback scandal report, from many experts’ eyes, are full of political meanings that the hospital market will be changed. From Taiwan’s best practices, where they had a similar hospital market experience 40 years ago, they introduced private competitors to compete with the public sector to get rid of kickback. From our view, in the short term, it is really hard to change the situation of public hospitals dominating the market. But separation of drug sales from hospitals (SDSH)) might be the most direct and effective way to weaken the link between the physicians and pharma companies. If SDSH is applied in China, it will be a totally different market for all the pharma companies than what we see today, a new market environment that could well de-risk the political issues that are always bubbling under the surface in China.