Navigating China's healthcare compliance landscape: New guidelines to mitigate commercial bribery risks

China's State Administration for Market Regulation (SAMR) has released the draft Compliance Guidelines for Healthcare Companies to Prevent Commercial Bribery Risks (Draft Guidelines) for public comment. The Draft Guidelines, issued on October 11, 2024, set out the regulator's expectation on how pharmaceutical and medical device companies operating in China may reduce or prevent commercial bribery risks. They also show the continued regulatory development in building corporate compliance programs with global standards for healthcare companies in China.

Risk-based categorization for business conduct

The Draft Guidelines address risk identifications in nine scenarios, including (1) academic visits and exchanges; (2) business hospitality; (3) consulting services; (4) outsourcing services; (5) discounts, rebates, and commissions; (6) donations, grants and sponsorships; (7) providing medical equipment without charges; (8) clinical research; and (9) retail sales. The Draft Guidelines also outline process in remediating compliance risks, self-disclosing misconduct to the SMAR, and cooperating in SMAR's investigations.

The Draft Guidelines set out business conduct into four categories: "mandatory," "permissible," "recommended," and "encouraged."

• Mandatory conduct is compliance obligations explicitly stipulated by existing laws and regulations such as the Anti-Unfair Competition Law (AUCL), the Drug Administration Law, and international or national standards. For instance, healthcare companies should request their representatives to strictly comply with the rules and policies of healthcare institutions, and conduct academic visits and exchanges only at permitted times and places.
  
  
• Permissible conduct is industrial consensus-based practices that meet the management requirements of health and drug regulators but are not mandatory compliance obligations. For instance, healthcare companies may provide medical equipment to medical and health institutions free of charge without transferring ownership, but the ownership of the equipment to be provided must be clearly stipulated in the contract.
  
  
• Recommended conduct is the industry best practices in managing commercial bribery risks. For instance, it is recommended that healthcare companies pay service fees to healthcare providers (HCPs) through bank transfer.
  
  
• Encouraged conduct is practices that are conducive to guiding companies to establish and implement a long-term mechanism to control commercial bribery and promote the high-quality development of medical and health undertakings.

The Draft Guidelines set out risks that healthcare companies may identify and prevent into four categories: "prohibited," "avoided," "restricted," and "monitored."

• Prohibited conduct is the ones explicitly prohibited by existing laws and regulations, such as misconduct in commercial bribery cases handled by market regulatory authorities. For instance, healthcare companies are prohibited from providing hospitality and gifts to unrelated persons such as the close relatives of the person who will receive hospitality, or transferring benefits or making payments to such persons in the name of hospitality.
  
  
• Avoided conduct refers to actions that, while not explicitly prohibited by law, are likely to facilitate or enable commercial bribery based on current enforcement practices and industry consensus. For instance, healthcare companies are to avoid arranging business receptions in scenic spots or high-end luxury locations, or choosing venues associated with entertainment activities.
  
  
• Restricted or monitored conduct is medium-to-low risk conduct that does not conform to general compliance principles and may lead to commercial bribery under certain conditions. For instance, companies are to closely monitor discounts, allowances, or commissions paid without executing a contract.

Guidelines for high-risk activities

Building upon existing regulations, the Draft Guidelines cover a wide range of activities that are critical to the operations of healthcare companies and introduce new measures to ensure a higher standard of compliance. In this section, we highlight select high-risk activities, compare the Draft Guidelines with existing laws and regulations, and summarize recent enforcement actions.

Academic visits and exchanges

The Draft Guidelines expand compliance obligations regarding academic visits and exchanges to cover medical representatives of both pharmaceutical and medical device companies, while prior regulations such as the Measures for the Administration of Registration of Medical Representatives (Trial Implementation) apply only to medical representatives of pharmaceutical companies.

Hospitality

The Draft Guidelines provide more specific requirements on business hospitality than the AUCL and other industry codes, and require hospitality to be reasonable, moderate, and compliant with legal and ethical standards. The Draft Guidelines emphasize monitoring the frequency of hospitality, prohibiting providing hospitality to family members of HCPs, avoiding luxury or entertainment venues, prohibiting organizing recreational events, prohibiting reimbursing hospitality expenses under the guise of meeting, training, or research costs, or using hospitality to gain competitive advantages or secure business opportunities.

Consulting services

The Draft Guidelines appear to allow pharmaceutical and medical device companies to directly pay speaker fees to HCPs, clarifying the concerns previously raised during the healthcare anti-corruption campaign that such direct payments are no longer allowed. According to the Draft Guidelines, consulting services should be based on genuine, reasonable, and legitimate business needs. Payments must be reasonable, documented, and preferably made through bank transfers. Cash payments are discouraged.

On November 12, 2024, after the Draft Guidelines were published, the National Health Commission (NHC) held a seminar with representatives from large multinational and domestic pharmaceutical and medical device companies, reemphasizing the government's willingness to support and guide the development of legitimate academic exchanges and collaborations.
The Draft Guidelines and the NHC seminar have sent a message that regulators will use a factor-based approach to determine whether speaker fees paid directly by healthcare companies are proper rather than imposing a complete ban on such payments. We have seen regulators using the same approach in recent enforcement actions. In June and July 2024, the Enshi Administration of Market Regulation (AMR) in Hubei Province imposed CNY4 million (USD563,380) and CNY25.5 million (USD3.6 million) in penalties on two domestic pharmaceutical companies for providing improper speaker fees to HCPs in violation of the Drug Administration Law. In both cases, the Enshi AMR found that a group of HCPs participated in academic events organized by the companies without obtaining consent from their hospitals, and that meeting documentation casted doubt on whether some of the events were actually held, whether the amount of the consulting or speaker fees were reasonable, and whether the events had genuine academic value.

Sponsorships

According to the Draft Guidelines, healthcare companies should avoid providing sponsorships directly to medical institutions or their internal departments or individual health providers, or designating sponsored parties through a third party. Healthcare companies are prohibited from using sponsorship as a pretext to influence HCPs to prescribe medical products or to facilitate the recommendation, promotion, purchase, and use of their products in order to seek competitive advantages or business opportunities. In July 2024, before the release of the Draft Guidelines, SAMR, the Central Social Work Department, and the Ministry of Civil Affairs jointly published the Compliance Guidelines for Charging Behavior of Industry Associations and Chambers of Commerce, prohibiting the transfer of improper benefits under the guise of donations or sponsorships. The Draft Guidelines reemphasize the key provisions in the July 2024 guidelines.

In recent enforcement actions, we have seen healthcare companies being fined for improper speaker fee payments relating to sponsored meetings or meetings organized by third parties. For example, in July 2024, the Wuchang AMR in Hubei Province imposed CNY1.8 million (USD253,520) in fines and disgorgement on a domestic pharmaceutical company for paying improper benefits to HCPs relating to meetings sponsored by the company, in violation of the AUCL. Wuchang AMR found that the company obtained fake value added tax invoices from multiple third parties and cashed out funds, some of which were used to pay speaker fees to HCPs in cash without documentation in connection with several sponsorship meetings.

Outsourcing services

Outsourcing services refer to services provided by third parties, such as contract research organizations (CROs), contract manufacturing organizations (CMOs), and contract sales organizations (CSOs), for the research and development, production, and distribution of pharmaceutical or medical products. Although recent enforcement shows that regulators have increasingly required companies to assume responsibilities in managing third parties, current laws and regulations do not clearly define what these responsibilities are. The Draft Guidelines provide guidance in selecting and managing third-party service providers, including the requirements or recommendations for due diligence, compliance certificates, and anti-corruption clauses in the agreements with third parties.

In recent enforcement actions, local regulators found healthcare companies liable under the AUCL for commercial bribes committed by their CSOs. For instance, in August 2024, the Anlu AMR in Hubei Province fined a domestic pharmaceutical company and its CSO CNY142,000 (USD20,000) and CNY401,792 (USD56,590), respectively, because the CSO was found to provide, through a third party, gifts and improper benefits to HCPs under the guise of sponsorships and speaker programs. The company paid the CSO a service fee at five percent of the sales revenue for promoting its drugs at a Guangdong hospital.

Takeaways

The Draft Guidelines mark a milestone in combating commercial bribery in the healthcare sector. Proactive adherence will not only meet regulatory expectations, but also enhance compliance, foster fair competition, and build an effective compliance program to manage bribery risks.

Companies are encouraged to establish robust internal controls to detect and address potential risks, including internal investigations, risk assessment, corrective actions, and long-term plans such as continuous improvement, monitoring, evaluation, and review to prevent the recurrence of similar risks. If companies identify certain bribery risks, they are encouraged to assess the obligations of voluntary disclosure or admission under the current regulatory framework and take immediate remediation actions.