Eighteen months ago, when the GSK China story first broke, if someone had said the outcome would be one British citizen in jail, a naturalized American citizen as well, an all-time record fine by Chinese regulators against the company, and the company’s China head and four other Chinese executives all with criminal charges handed down, you either would have been called an alarmist, or someone with particularly good information about what had been going on for years within the company’s sales teams.
The story itself has the makings of a perfect storm – a company vulnerable to China’s corruption crackdown because of its own aggressive tactics, a high profile executive’s dismissal, a sex-tape, and broader frustrations by foreign companies over China’s more hostile posturing towards them. It is precisely because of these various threads to the overarching narrative that companies now need to take a step back and reflect on how they should understand this situation, and adapt new approaches to China’s healthcare economy where appropriate.
Last week while speaking at the APAC Pharmaceutical Compliance Congress in Shanghai, I jokingly said there were two really insightful things I had to offer. The first up was this – and I asked everyone in attendance to be sure and write this down … don’t pay bribes! Most people laughed, but it bears repeating before we get into the more nuanced aspects of interpreting the post-GSK world, that the company’s behavior in China was hardly in the gray area relative to established FCPA and UK Bribery Act standards. Michael Woodhead, a Sydney based medical journalist with extensive experience reporting on China’s healthcare system, has a superb examination of the company’s actions in China, based on court transcripts and released documentation. I urge you to read it, if only because it should serve as an important foundation upon which to build any further interpretation of these events.
Things get tricky when we wrestle with the structural reasons China’s healthcare system is vulnerable to this type of behavior, and the unpleasant truth that domestic Chinese pharmaceutical companies are guilty of similar and to most foreign companies’ eyes, much worse behavior. There is a lot of background to read on both matters, most important of which is to understand that this group of non-compliant behaviors reflects economic rent seeking behavior on the part of Chinese hospital administrators and doctors who are desperate to make up for chronic under-funding by the government. But for our purposes today, we have to set these questions aside and instead ask ourselves how foreign companies should interpret, and adjust, based on the GSK saga.
The first adjustment is also the most painful: foreign multinationals need to begin to dial back their growth expectations from the China market. This is absolutely not to suggest, as some alarmist voices inevitably will, that the China market will not continue to grow, or that China will not continue to be an exciting and profitable market within which they can successfully navigate. What it does mean is that the hunt for revenue in China needs to be risk-adjusted.
In China’s pharmaceutical and medical device markets, this is easier said than done. The more rural the hospital, the more likely they continue to be dependent on non-compliant sources of revenue. If your sales teams are on the hunt for revenue in places they haven’t been before, more than likely they are ending up in new hospitals where the compliance risk is pretty high. It is absolutely essential that multinationals connect the dots between how their China sales teams are casting about for revenue and the compliance risks they run.
The second adjustment is to recognize that how multinationals talk to key opinion leaders in China is going to need to start looking a lot like how they talk to this cohort in more developed economies. In many cases, this is going to require internal standards for China that may seem more restrictive than what Chinese regulators have asked for thus far. That is precisely the point. The issue for multinationals operating in China’s healthcare economy is not only actual, but also perceived behavior. How companies talk to key opinion leaders matters to the political optics here, in ways that require companies to ask how the government and even the Chinese public more broadly, perceive even compliant influence-building activities.
This second pivot leads me to the third and last adjustment foreign multinationals need to keep front of mind. If you recall, earlier in the column, I mentioned that during a speech last week I offered up the idea of two big insights, the first of which was pretty basic. The second is perhaps the one that requires more strategic thinking: multinationals have to recognize that China’s healthcare system is at a very critical and vulnerable juncture, and that because of this, China’s central government views healthcare reform as one of the central areas where its very legitimacy is being tested. Healthcare in any country is a political good; it is particularly so in China.
What this means in practice is that for the next decade, there is going to be a constant, and at times unproductive, tension between government and business, and that foreign multinationals are going to be at the front lines of this. Multinationals need to be paying very close attention to how the pilot projects China has just announced actually work.
Do hospital administrators see significant new rounds of funding and reimbursement from the government?
Does this money flow down and positively impact doctors’ compensation, or does it get absorbed by a new round of infrastructure spending or general hospital overhead?
Does the national insurance scheme continue to advance into new therapies with reductions in what families are required to pay?
Do prescription sales actually get severed from the hospital?
Does a viable private pharmacy market emerge in China?
If the answers to these questions are negative, then multinationals need to recognize that even if their behavior is complaint, the Chinese government will almost certainly feel it needs to act in ways that could be unproductive and unhealthy to future additional investment by foreign pharma and device companies. The unquestioned expectation in China is that the government needs to provide healthcare to its people. Companies need to recognize that, if questions about healthcare access and affordability continue to mount, the government is very likely to get more aggressive.
It is critical to remember that the top three concerns of Chinese families are corruption, environment and healthcare. Nowhere do these three concerns come together more than in China’s hospitals, and because of this, foreign companies selling and investing in the country’s healthcare economy need to keep front and center a way to monitor and manage expectations around how the government will treat them, and what could happen should China’s healthcare reforms come up short of what the country needs.
