China Cracks Down On Health Care Corruption

David Greene talks to economist Patrick Chovanec about the corruption scandal unfolding in China involving British pharmaceutical maker GlaxoSmithKline.

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RENEE MONTAGNE, HOST:

This is MORNING EDITION, from NPR News. I'm Renee Montagne.

DAVID GREENE, HOST:

And I'm David Greene.

China is cracking down on corruption in its health care system. And this is causing big headaches for foreign pharmaceutical companies operating in this fast-growing market. One drug maker in particular, Britain's GlaxoSmithKline is the target of a high-profile bribery investigation. To find out what's going on, we called Patrick Chovanec. He's an investment strategist in New York and was a business professor in Beijing for many years.

Welcome to the program.

PATRICK CHOVANEC: Good to be with you.

GREENE: Bring us up to speed. I mean this scheme that is alleged with GlaxoSmithKline, how might it have worked?

CHOVANEC: So, what Chinese stories are alleging is that GlaxoSmithKline executives in China bribed doctors to prescribe medicine and bribed hospitals to stock medicine. And, you know, this kind of thing is actually very frequent in Chinese business circles.

GREENE: This is ordinary in a business like this.

CHOVANEC: Right but, you know, it's obviously unacceptable for a multi-national corporation to be involved in this kind of stuff.

GREENE: I wonder: How common are cases like this in the pharmaceutical industry in China?

CHOVANEC: Well, the practices are very common. In fact, I would say they're standard operating practice to bribe doctors to prescribe medicine. The reason why is because they're underpaid within the state hospital system. They don't make enough money, in their own mind. And, you know, very frequently if you are somebody who wants surgery, for instance, to schedule a surgery in a hospital in China, it's not unusual for you to have to pay a tip, or a bribe essentially, to the doctor to actually schedule that surgery.

So there's a lot of money under the table within the Chinese hospital system both, you know, from patients and also from drug companies.

GREENE: Well, a lot to sort out here. So if this is the way the business works in China routinely, I mean now they've suddenly decided to go after Western companies, or do they go after domestic companies, as well?

CHOVANEC: Well, you can interpret it two ways. You know, the first is that maybe they're trying to crackdown on this practice, and going after foreign companies is the political path of least resistance. The other interpretation is that they're targeting foreign companies. I don't think you have many foreign business people in China who would argue with the idea that bribery is illegal, and that foreign companies should be held at that standard, as well.

But if it's selectively enforced it could be used just as a cudgel to gain competitive advantage for Chinese domestic companies over foreign companies that otherwise are doing a better business in China. And we actually saw very recently, in another industry, where foreign producers of infant formula had been targeted for anti-trust prosecution by Chinese authorities for allegedly price-fixing because they're able to charge a premium.

Now, the reason they're actually able to charge a premium - in terms of price - is because there had been a lot of scandals from domestic infant formula producers, making unsafe infant formula. And Chinese consumers don't trust those domestic brands and so they're willing to pay and actually go to great lengths to get their hands on foreign infant formula.

But instead of addressing the underlying issue, which is the quality problems in the Chinese market, Chinese authorities have gone after foreign companies who are succeeding. And that's kind of disturbing.

GREENE: Is there a reason this is happening now?

CHOVANEC: It's hard to say. You know, we have seen recently foreign companies being targeted - Apple, KFC - by Chinese state media. You know, maybe part of it is protectionism. But there also is very real concern about the kind of bribery that takes place and the kind of corruption that takes place within the medical system. And there's a lot of popular frustration. And I think perhaps if that popular frustration can be channeled towards foreign entities, well, then that benefits the Chinese leadership.

GREENE: Patrick Chovanec is chief strategist at Silvercrest Asset Management in New York. Thanks so much for joining us.

CHOVANEC: You're welcome.

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