The Top 5 Corruption Risks for Pharmaceutical and Medical Device Companies

Pharmaceutical and medical device companies are fast becoming the enforcement punching bag, eclipsing the long-suffering status of the oil and gas energy.  If you ignore the political and public relations challenges facing the pharmaceutical and medical device industries, you are being naive.  In almost every possible area for enforcement, pharmaceutical and medical companies have been the targets of aggressive criminal, civil and regulatory action.

While a new and more aggressive anti-corruption enforcement scheme was launched in 2007 under the Bush Justice Department, the continuing series of anti-corruption enforcement actions against these companies is the repeating headline in 2012 for FCPA enforcement.  There is plenty more to come – there are close to 20 more companies who have publicly disclosed ongoing anti-corruption investigations.  Eventually, this trend will slow down but for now it keeps going. 

Pharmaceutical and medical device companies know how to comply with anti-corruption laws.  They are experienced in the world of compliance given the significant involvement of the US and foreign governments in regulation of the health care industry. 

The Justice Department’s sweep of the pharmaceutical and medical device industries rests on the premise that foreign doctors, nurses and other health care professionals are “foreign officials” when they work at a public hospital or are part of a public health care system.  The Justice Department’s premise has never formally been challenged in court, but it is likely to be upheld under court review. 

Given that basic assumption, pharmaceutical and medical device companies face a number of significant risks, all of which are exacerbated by industry practices.  Here are the Top 5 Corruption Risks:

1.  State-Owned Enterprises – The foreign health care business is worth billions of dollars in revenues.  Pharmaceutical and medical device companies depend on foreign sales to foreign hospitals and doctors.  These interactions are governed by the FCPA with limitations on giving anything of value to doctors, nurses or other health care professionals with a corrupt intent to increase or retain business.  Many of the enforcement actions involve direct payments made to foreign hospitals or doctors in exchange for commitments to purchase or recommend drugs or devices to hospitals and/or patients.

2.  Third Party Agents – In many countries, particularly China, pharmaceutical companies have to rely on a network of third party agents, subagents and distributors to interact with public hospitals, doctors and other health care professionals.  In China, individual agents are required for each individual public hospital, who in turn will rely on subagents.  The number can quickly add up in these markets.  Due diligence review, approval and monitoring can be a real challenge for any compliance department.  Third party agents rely on systems for making improper payments to further their business and companies have to be careful to avoid or restrict such possibilities.

3.  Sponsorship of Medical Conferences – A continuing area of abuse has been requests or demands by foreign hospitals, doctors and professionals for “sponsorship” to medical conferences.  These payments can quickly add up and require the companies to pay for travel, lodging, and food for foreign officials to attend these conferences.  It is a challenge to keep these expenditures within the FCPA affirmative defense for bona fide and reasonable payments designed to promote the company or its products.  It has been an area of abuse and one which requires careful attention.    

4.  Foreign Clinical Trials – Approximately two-thirds of all clinical trials are now being conducted in foreign countries, typically at foreign medical institutions.  Companies use Clinical Research Organizations and International Review Boards to manage the clinical trials with foreign medical institutions.  Most foreign medical institutions are government-owned and operated, thereby transforming relevant officials into “foreign officials” under the FCPA.  Companies have to monitor and ensure that interactions between CROs and IRBs and foreign medical institutions comply with the FCPA.

5.  “Anything of Value” – The risk of improper payments in the health care industry extends into a number of industry practices, including product samples, gifts and discounts, charitable contributions and other areas where foreign hospital officials and doctors may be used to certain benefits from foreign industry which may be permitted under industry codes and regulations but may raise red flags under corruption laws.

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2 Responses

  1. September 20, 2012

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  2. September 21, 2012

    […] Top five corruption risks for pharma and medical device manufacturers (Corruption, Crime & Compliance) […]