China and Corruption: The Case of GlaxoSmithKline

By: Conner Lee 

GlaxoSmithKline (GSK) is Britain’s biggest drug maker. Chinese authorities found GSK guilty of bribing both hospitals and doctors to help promote their products in China, using a network of nearly seven hundred travel agencies to pay medical professionals, health-related organizations, and government officials. According to Chinese authorities, GSK funneled about 3 billion yuan, or US$482 million, through this network to recipients. Receipts were forged for purchases and transactions that never took place, including fake conferences. At first, GSK denied any involvement in the bribes. Then, after an internal investigation, GSK admitted that certain executives acted independently in ways that broke Chinese law. (Rajagopalan) Chinese television even went so far as to air an alleged confession of one of the four senior GSK executives under investigation of how the scheme relied on “fake conferences and travel agencies to create receipts for services that were never performed.” (Thompson) GSK denies the sums of money are as high as Chinese officials suggest.

The Chinese officials also seemed to emphasize how the cost of the bribes was passed directly to Chinese consumers. In other words, doctors and other medical staff were bribed to sell their products and the cost of those bribes was added to the price of the products that consumers paid for. In some cases, the final price of the product was several times the cost in other countries. (BBC News) Chinese officials also claim GSK bribed officials to obstruct Chinese investigations, according to a security ministry official. (Bloomberg)

Five senior executives of GSK were arrested and subsequently found guilty of bribery. Mark Reilly, the chief executive of GlaxoSmithKline operations in China, received a suspended prison sentence. Four other GSK managers in China received similar suspended sentences. GSK’s local subsidiary in China was found guilty of bribery and fined nearly US$500 million, the largest corporate fine in China, according to the official Chinese news agency Xinhua. While the total fine is large, it is dwarfed by GSK’s annual free cash flow of about £4 billion. The company is also being investigated in other countries, and faces allegations that it bribed doctors in “Poland, Iraq, Jordan, and Lebanon.” (Rajagopalan) GSK wants to be the “The first company in the drugs industry to stop paying outside doctors to promote its products.” (Rajagopalan) It also claims to want to stop company policies that incentivize sales representatives to bribe doctors, and end payments for medical professionals to attend conferences. (Rajagopalan) In addition, since GSK was accused of bribery, its sales in China have taken a hit as well, and may be down permanently. In 2013, GSK’s sales dropped thirty percent after it was accused of corruption. (Financial Times) Once one of GSK’s fastest-growing markets, GSK’s medicine and vaccine sales, dropped 61% in the country, and sales of its consumer health products dropped by 29%. (Jack)

Corruption in China

China in the middle of a growing anti-corruption program, a program initiated by Chinese President Xi Jinping (Shobert). Cases of corruption used to be rare; however, due to public discontent with corruption in the Chinese Communist Party, the government was forced to respond. Announcements of investigations of party officials and businesses are now constantly in China’s headlines. (First Source from Hatton)

Corruption is a serious problem in China; even low-level officials can easily make small fortunes. Party officials can make millions of dollars a year in bribes and blackmail. The family of the official who launched the anti-corruption campaign, according to Bloomberg, holds an estimated $376 million. (Second Source from Hatton) In 2013, China was ranked 80^th out of 178 countries in the Transparency International’s Corruption Perceptions Index. Corruption is widely believed to be one of the major barriers to China’s social and economic development; some analysts warn that corruption threatens the country’s future and the popularity (and power) of the Communist Party. The Chinese public views corruption as a major problem. Many citizens in surveys say it is the biggest problem the country faces. Citizens describe corruption as unrestricted and rapidly growing. According to some estimates, approximately 10 percent of Chinese government funding is used as bribes, kickbacks, or is stolen. Even when investigations take place, the likelihood of corrupt officials going to jail is less than three percent. (Pei)

Anticorruption attempts have largely been failures in China. It is hard to enforce laws and regulations when everyone is breaking them. However, it is also possible the Western media has a false perception of how bad corruption is in China. As one source notes, “Between 1979 and 2000, over 700,000 cases for investigation were filed against officials by investigators.” Of these, approximately 56 percent of such cases were embezzlement, 28 percent bribery, and misuse of public funds 16 percent. If this is true, then it is possible the Chinese government may be doing more than it seems to confront corruption. (Manion, 87)

Corruption in China increased dramatically after 1978, and has grown hand-in-hand with the economy. As one source notes, “The Chinese economy has, it would seem, flourished even as corruption worsened.” (Wedeman, 4) Some nations are able to succeed despite high levels of corruption, and China seems to be one such country. (Wedeman, 4) Many authors seem to agree that while corruption and rapid growth may coexist together in the short-term, they are essentially contradictory. While the steps the Chinese government has taken to curtail corruption may have been ineffective, it is possible these efforts have prevented corruption from spiraling out of control. (Wedeman, 8)

China’s Healthcare System

China is in the midst of reforming its health care system, which is being expanded at a rapid pace. This includes a new national health insurance plan, which covers basic health needs. Unfortunately, these additions are “Being built on a top of a very weak foundation.” “Doctors are chronically over-worked and under-paid” (Shobert), working long hours and earning far too little. In addition, hospitals are stuck between fund shortages and rising health-care costs. Consequently, alternative means of revenue have been found. In this case, doctors seem to be making up for low salaries with bribes, as seen in cases such as the GSK scandal. In addition, Chinese citizens often bribe health care professionals to ensure that they receive good treatment when needed. (Shobert)

There are several major forms of corruption in the Chinese health-care system. The first is the pricing system. The government has laws on how much hospitals can charge for various products and services, but hospitals often simply ignore these laws, setting their own prices or simply overbilling patients. (Tam, 267) There have been several cases in which hospitals have charged patients for care they did not receive. Hospital staff at all levels were found to be accepting bribes, from patients that expect better medical services to medical equipment and pharmaceutical firms hoping to sell their products. Doctors, especially, accept bribes often. (Tam, 268) Hospitals have been documented to sell patients cheaper fake and substandard medications, illegally charging them the cost of the real medication and then pocketing the difference. Hospitals reap vast profits this way, especially in medical departments that treat serious illness, such as oncology. (Tam, 269)

The medical industry is stuck between rising expenses and declining budgets. China has a desperately underfunded public health care system. Between 1985 and 2005, government spending as a percentage of total health-care spending dropped from an estimated 38.6% to 17.9%. Health expenditure by private organizations declined as well. Meanwhile, personal spending on health care increased, from 20.4% in 1978 to 52.2% in 2005. Hospitals are forced to make up for the difference using illicit income to cover their expenses. (Tam, 270, 272)

Many health-care professionals use corruption as a means for personal gains. Loopholes and lax enforcement of law worsen the problem. One way in which physicians gain personal profit is by prescribing drugs and medical procedures that patients do not need. Sometimes part of the money paid for the medicine is kicked back to the physician. (Tam, 273) Doctors who are found accepting bribes are rarely penalized (Tam, 274), authorities who are aware of the budgetary problems the health care system faces are often unwilling to confront corruption.

Competition in the Chinese health-care system is intense, and many pharmaceutical firms resort to bribery and corruption as a means of selling their products. Chinese firms typically spend twenty to thirty percent of the price of their products on bribing doctors and hospitals, and customers are forced to pay the costs of these bribes. (Tam, 274)

The problems in the health industry have diminished public trust in the hospital systems. Various surveys indicate that many patients feel they must bribe doctors to ensure they receive good care. Otherwise, they fear poor treatment within the health care system. This sentiment cannot be understated. (Tam, 277)

Many foreign companies complain that, “China is broadly becoming a less hospitable place for multinational companies to operate.” (Shobert) Many foreign firms are convinced they are being scrutinized by regulatory oversight, and they are being held to higher regulatory standards than their domestic counterparts. If these suspicions are in fact true, then domestic firms in China are likely behaving far worse than their foreign competitors. (Shobert)

Public pressure for reform in the health-care industry is growing. A backlash threatens to undermine the Chinese government, and public resentment regarding corrupt officials in the industry is growing. While past attempts to deal with corruption in the industry have fallen short, it is possible the government may eventually be forced to deal with the problem. For instance, in 2006, 2,000 people rioted outside a hospital after a three-year old boy died of ingesting pesticide. The doctors there had refused to treat the boy because the parents did not have cash on hand when they arrived at the hospital. According to some estimates, there were about 17,000 such incidents in 2010. Officials have good reason to fear a public backlash. It is also possible that reform attempts will fall apart as in the past.

Since the scandal, China has passed several bills aimed at dealing with corruption in the health-care industry. The National Health and Family Planning Commission issued two bills with “anti-corruption compliance requirements” (Ross and Zhou), as well as a “blacklist” of certain medical-device firms and pharmaceutical companies that have violated the law. Chapter 49 establishes “Nine prohibitions” aimed at preventing bribery in the health-care sector. These prohibitions are aimed at preventing institutions and individuals from accepting various types of bribes and cutbacks, including preventing medical personnel from accepting commissions or kickbacks of any kind from medical institutions other than the one they work at. Chapter 50, however, establishes a blacklist system that shuts firms and individuals who have participated in bribery out of the health-care system. The last attempt at doing this was a 2007 law that was ineffective, and this new law aims to be much more effective. These bills are now law. (Ross and Zhou)

The GlaxoSmithKline Case

The case that GlaxoKlineSmith bribed Chinese officials does have merit. The company itself has acknowledged that there seems to have been some misconduct by certain executives, so it is almost undeniable the bribery took place. There is another side to this case, however. Bribery and other forms of corruption are not just common in China, companies are actually expected to bribe simply as a way of business. In many hospitals, all of the staff can be expected to be involved in the bribery system. It is so common there are literally systems in some hospitals to divide the profits from the bribes.

GSK was wrong in participating in the bribery schemes. It also was wrong in participating in corruption even if it was following expected industry norms in the country. It is never ethical to do a wrong act (in this case bribery) even if everyone else is doing the same act.

Given that large numbers of foreign companies complain of being unfairly scrutinized by Chinese authorities, it is likely the Chinese government unfairly investigated GSK because it was a large, foreign company with rapid market share growth that threatened domestic industry. Because bribery is so common, and because everyone does it, the Chinese government has the power to pick winners and losers. The government can arrest and press charges against any company it does not like, and rightfully claim the company was in violation of the law. GSK, in particular, was targeted for being a big, foreign firm with high market share growth in China.

Ultimately the consequences of the bribery scandal had a net negative impact on many people especially patients who carried most of the cost of corruption. The bribes caused many doctors to prescribe certain medications when they should have prescribed others, and it’s caused certain patients to receive better treatment than others. Corruption also vastly undermined public trust in the Chinese health care system, with most of the public deeply skeptical of hospitals and physicians. Unfortunately, bribery and corruption are the only ways that the Chinese health care system gets the funding it needs. Without bribery and other such forms of illegal funding, the Chinese health care system would either go bankrupt or go into debt. But bribery doesn’t just affect the people who have direct association with the act. It affects the behavior of a large segment of society. Even when everyone else is doing something bad, doing the action yourself only makes the problem worse. In the case of GlaxoSmithKline, the consequences of bribery actually contribute in undermining society, making the act unethical.

Works Cited:

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