Struggling to regulate over-prescribing of drugs

February 24, 2014 by Wei Yang

China’s investigation into the operations of British pharmaceutical giant GlaxoSmithKline – which led to the arrest of four senior Chinese nationals working for the company after they were accused of paying nearly £300m in bribes to doctors and officials to boost sales of the company’s profits – shows that the government is serious about tackling corruption and misbehaviour in the pharmaceutical industry. It also exposes some fundamental problems in the nation’s medical system that need to be addressed.

Dozens of GSK employees were arrested in 2013 over allegations that the company funnelled up to £300m in bribes to doctors and hospitals to persuade them to prescribe its drugs. Soon after the GSK scandal a whistleblower came forward to accuse another pharma giant, Eli Lilly, of spending more than RMB30m (£3m) in bribes to doctors to encourage them to prescribe its medicines instead of rival products. A few months later yet more Big Pharma companies, including Swiss drug maker Novartis and French pharmaceuticals firm Sanofi, were targeted in investigations by Chinese authorities over allegations of bribing doctors and health officials.

Although most of the Big Pharma companies have denied corporate involvement in the alleged wrongdoing, there is plenty of available information to show that offering commissions to motivate prescription has become one of the main strategies used by drug companies and manufacturers to promote their products.

In China, marketing drugs is a complex and costly procedure, which usually involves three levels of authorities: the State Food and Drug Administration (SFDA) – which frames health policies and processes drug approval; hospital pharmaceutical committees – which facilitate the drug circulation system by making a decision about which drugs are to be listed in a particular hospital pharmacy; and medical doctors who prescribe medicines.

Pharmaceutical companies employ dedicated teams to target these three different levels of authorities. They also are allocated substantial funds as part of their sales managers’ “promotion” budgets. In relation to doctors, the commonest method used to motivate prescriptions is to offer doctors’ kickbacks, usually in the form of gifts, direct payments, or sponsorship for attending conferences. According to The Wall Street Journal, GSK’s China sales staff provided doctors with speaking fees, cash payments, lavish dinners and all expenses-paid trips in return for prescribing the firm’s drugs.

While these marketing strategies push the sales of drugs, they also have inevitable consequences on the healthcare system and the population’s health. Evidence shows that doctors – driven by payments from pharmaceutical companies– tend to over-prescribe expensive and sometimes unnecessary drugs for patients. One study reports that unnecessary use of antibiotics is pervasive in village clinics and township hospitals in rural China, where doctors and hospitals derive up to half of their operating income from selling drugs.

It is also noted that supplier-induced prescription is considered the main cause of the dramatic escalation of healthcare costs in China, resulting in an increase in costs of health services, as well as creating affordability problems for the poor and the vulnerable.  In the 2008 National Health Survey, the average annual cost for inpatient visits involved out-of-pocket payments equivalent to approximately 52.69% of annual per capita household expenditure.

The GSK scandal has not only drawn attention to the need to regulate the rampant pharmaceutical industry but has also exposed some fundamental problems in the healthcare system itself. In particular, both doctors and hospitals have become dependent on the money provided by the drug companies, which has become one of the main sources of financing for most public hospitals in China. Since the hospitals no longer receive large government subsidies, most of them have to rely on the sales of drugs and medical services to survive.

Consequently, hospitals have established complex systems of incentives to encourage prescription by doctors and the use of medical services beyond what is required on medical grounds. Doctors’ salaries too are tightly bound to the revenues of their individual medical departments. The more revenue the department generates, the larger the bonus received by doctors. Pharmaceutical companies and manufacturers have just added another layer of economic incentives and kickbacks to the existing incentives in hospitals by offering drug commissions.

Rampant corruption is often found in areas with the least government supervision. Although over the past few years, a number policies and regulations have been introduced that are designed to alter the perverse incentives embedded in the health care system, little success has been achieved. Aside from the problem of lack of funding for public hospitals, internal rigidities and a bureaucratic organisational culture are the main factors that stop the development of more effective regulatory policies in the healthcare sector.

Healthcare bureaucrats in regional government are also reluctant to channel local funding to cash-starved hospitals, or to supervise and regulate the healthcare market; either they have no incentive or are themselves part of the corrupt system. Since drug sales are important to the hospital, hospitals are also unlikely to report inappropriate prescriptions that are encouraged by under-the-table payments.

In July 2013, the State Council said it would reform drug pricing and procurement systems by introducing a number of initiatives including separating drug incomes from hospital revenues. The government’s determination to step up supervision reflects the country’s firm stance on fighting corruption and malpractice. However, regulating the pharmaceutical market to prohibit unapproved drug use is not a full solution to the problem. As mentioned earlier, the challenges that China faces in addressing many fundamental problems of its healthcare system are enormous.

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