Pandemic, Prosecutions Aside, Bribery Persists in Chinese Hospitals

By | Published Jul 20, 2021 | 100Reporters
Pandemic, Prosecutions Aside, Bribery Persists in Chinese Hospitals

PART 1 OF A TWO-PART SERIES

As the coronavirus pandemic threatened to overwhelm Chinese hospitals last year, Chinese resellers appear to have colluded to inflate the prices of ventilators and other essential medical equipment from multinational companies including Siemens, GE, and Philips, according to a review of public records on the sale of medical equipment in China.

The inflated prices did not translate into oversized profits for the multinationals. Rather, they appear to be part of a complex system through which third-party resellers allegedly camouflaged bribes to corrupt hospital officials. Court cases and further interviews suggest that regional representatives of the multinationals themselves at times tolerated or were directly involved in bribery schemes.

High-value MRIs, CT scanners, ultrasound machines and other equipment – all vital for diagnosing and researching the novel coronavirus – were sold for prices that ran from thousands to millions of dollars above their U.S. market prices. A Siemens CT scanner sold for $3.24 million at one hospital in China, when the top-of-the-line Siemens model carries a market price of $1.95 million. A GE Signa Pioneer MRI scanner sold to one Chinese hospital through a reseller for $5.1 million, while another hospital paid half that, $2.56 million, for the same machine.

A new search of public databases of purchases by Chinese hospitals, as well as recent court verdicts, reveals that despite pledges of reform, bad practices that led to criminal investigations and bribery convictions for the multinationals in the past have persisted with very little interference from corporate compliance departments – and were not slowed by the coronavirus outbreak.

Instead, the data suggests Chinese resellers representing major Western firms routinely submit coordinated, inflated bids to hospitals. The testimonies contained in past court cases, meanwhile, lay out how resellers agree on prices in advance in order to have a margin to pay bribes.

The bidding documents, which usually include the price to the end user, often contain such detailed technical specifications that it would be difficult for anyone other than employees of the manufacturers themselves to draw them up, suggesting that firms like Siemens, GE and Philips are at best tacitly assisting resellers engaged in bribery.

For Siemens in particular this represents a relapse into tolerating corruption, since the company was the subject of an unprecedented global bribery scandal in 2008, which led to one of the biggest corporate fines in history at $1.6 billion, followed by pledges of reform.

The new revelations suggest a “familiar cycle,” according to former corporate investigator Peter Humphrey, who worked in China for several years investigating corporate corruption, at one point bringing a case to court against pharmaceutical giant GlaxoSmithKline. In the aftermath of the case, Humphrey, a former Reuters correspondent, served two years in a Chinese prison for buying personal data.

“In my experience, companies neglect due diligence, turn a blind eye to corruption, until the bomb goes off,” Humphrey said. “Then the bomb goes off, they’re in trouble, part of the response is to launch a stronger compliance function, but after a number of years they revert to form.”

“The jungle grows back,” he said.

The costs of corruption have only climbed during the pandemic, as have their consequences, according to a recent Transparency International report. Unless “robustly countered,” the organization predicted, “pervasive cross-border corruption in health care will cost additional lives.”

Dangerous Resellers

Public tenders from across China are collected on the website chinabidding.com, a search of which reveals numerous suspicious deals. For instance, in May 2020 the Fifth People’s Hospital of Jingzhou, in the Hubei province not far from Wuhan, paid ¥2.4 million, or $340,000, for a GE Logiq S8 ultrasound.

The base price for a GE Logiq S8 ultrasound machine in the US is around $70,000, though additional features could raise the price to $150,000. Even the most high-end ultrasound machines don’t sell for more than $250,000 on the US market, according to the non-profit organization ECRI, which offers independent advice about medical devices for professionals in the US.

GE would not comment specifically on this deal or any of the others in this article, but in a statement, a GE spokesperson said, “We are committed to integrity, compliance and the rule of law in every country in which we do business.”

GE also insisted that the third-party resellers involved in such deals were not company representatives or agents, but GE’s customers. As such, the company maintains not only that it had no control over the prices resellers charged hospitals for its products, but that for GE to even know the price for the end-user would violate antitrust law in both the US and China, as this would be considered Resale Price Maintenance (RPM).

Antitrust lawyers dispute GE’s interpretation, noting that the laws don’t prevent a manufacturer from simply knowing the price that a reseller sets. Nor do they bar manufacturers’ employees from providing support to resellers submitting public tenders of their equipment. Indeed, China’s Ministry of Commerce requires declarations from manufacturers confirming that resellers in fact act as agents, rather than merely customers, of the manufacturers.

In another bid, from November 2019, a Chinese reseller sold Newport ventilators made by the US-Irish company Medtronic for ¥295,000, or $42,000, to the Southern Medical University Hospital of Integrated Traditional Chinese and Western Medicine.

The same machine, known as a Covidien e360 ventilator, sells for less than half that price on medical tech retail websites in the United States. In a statement, Medtronic said it did not control distribution pricing, and that many factors can influence how a product is priced. “Reseller pricing can further vary in China based on the nature of services associated with product delivery, education and training, and product service and support, among other factors,” a Medtronic spokesman said in an emailed statement.

But insiders in the Chinese health care market say none of those factors explain the price disparities. “If you look at the bidding documentation and the global prices, you can still see a huge gap in between,” said Meng-Lin Liu, a former Siemens compliance officer in China, who has analyzed dozens of such transactions. Hospitals pay the high bidding price to the resellers, but the resellers only pay the normal global price to the multinationals, Liu alleges. “Then afterwards they distribute this slush money to the relevant party, mostly the hospital decision-makers.”

Liu alleged exactly these kinds of bribery schemes in Siemens China ten years ago, before the company fired him. He brought a whistleblower retaliation lawsuit against the company in New York in 2014. (The facts of the case were never litigated. The court rejected the case partly on the grounds that the relevant law does not apply to a foreign national working for a foreign company. A Siemens spokesman said in a statement that Liu left the company by “mutual termination agreement,” while Klaus Moosmayer, Siemens’ Chief Compliance Officer at the time, said Liu was terminated following “performance issues.”)

Subsidiaries of the State

Many of the GE and Siemens sales cited in this article went through subsidiaries of Sinopharm, the short name of the China National Pharmaceutical Group Corporation (CNPGC), a huge state-owned conglomerate with $70 billion in revenue last year. Where manufacturers bypassed intermediaries to sell directly to hospitals, prices were often competitive with the US and European markets – scuppering arguments that tariffs or other legitimate charges unique to the Chinese market are behind the higher cost of equipment.

Bribing foreign public officials, such as hospital officials in a public health care system, is illegal under the US Foreign Corrupt Practices Act (FCPA). Hence the need for middlemen, who offer a form of legal insulation. In a country like China, where economic power flows from the political elite, FCPA experts say multinationals do their best to avoid scrutinizing how sales are made, or collude with corruption while maintaining a veneer of compliance. But as Tom Fox, veteran FCPA lawyer and independent consultant, put it, “Under the FCPA, it’s of zero consequence who sells the equipment; the manufacturer is liable. It doesn’t matter what you call it: Whether it’s a reseller, whether it’s a distributor or an agent – if I’m selling Siemens equipment, Siemens is 100 percent always liable for the bribery.”

Matt Kelly, publisher of the Radical Compliance newsletter, noted that the SEC has prosecuted several US companies for corruption in China. In some cases, sales executives in China had their employees keep separate spreadsheets and use private email systems to work on certain deals. Price discrepancies, where the difference between the reseller’s price and the real sales price is used as a bribe, are not uncommon.

“There is a lot that local executives at any large company would be able to try to do to keep head offices from knowing, and they would certainly find willing co-conspirators in intermediaries and hospital officials and regulators in China, who would be receiving the bribes,” Kelly said.

In 2018, Germany’s Süddeutsche Zeitung reported on the involvement of employees of Western companies in bribery in Chinese health care, as did The New York Times a year later, based on bribery trials in Chinese courts. This all came a decade after Siemens agreed to pay one of the biggest fines in corporate history in 2008 as part of a plea agreement with the SEC over accusations of a global bribery network.

“Obviously the consequence of this bribery is that China’s health sector is overpaying for certain goods and services such as MRI scanners,” said Humphrey.

 

Corruption and the Pandemic

Amid this backdrop of long-standing corruption, the coronavirus outbreak raised the stakes, fueling rising demand for medical equipment. Invasive ventilators are used for the most severely ill patients, taking over heart and lung functions as their bodies fight the illness. CT machines, MRIs, and ultrasound machines not only diagnose and monitor COVID-19 patients, but are used to research how the disease affects the heart and brain, as well as the lungs.

One tender, published April 7, 2020, shows the Fourth Affiliated Hospital of Harbin Medical University, in northeast China, seeking bids for a Siemens CT Scanner to detect pneumonia caused by coronavirus. While government documents do not name the model selected, they do give the price paid: ¥22.98 million, or $3.24 million. That surpasses the typical cost of the most expensive Siemens machines, the SOMATOM Force or the SOMATOM Drive, in the US and elsewhere in China by more than $1 million.

In the US, the SOMATOM Force currently sells for about $1.95 million, while the SOMATOM Drive can be had for $1.68 million, according to the New York State Office of General Procurement Services, which publishes the prices of medical devices it buys for state agencies.

Former compliance officer Liu said that tracing bribery can be complicated by a lack of communication between company departments. “They are often isolated,” he said. “For example, the contract management may be handled by the legal department, and the bidding process may be handled by the business management department.”

In other words, equipment makers like Siemens often do not check to see how the price quoted in the contract ultimately signed with the hospital compares with the reseller’s price that won the bid, Liu said. “So unless someone, like me, wonders whether the contract matches the bidding record, each department will consider they have fulfilled their responsibility.”

Typically, employees of the multinationals in China must approve bids submitted by middlemen, Liu said, adding that Siemens employees are generally present at the bidding evaluation meeting to answer questions from resellers.

In a statement, a Siemens spokesperson in Germany insisted that resellers were “completely free” in their pricing. “The distributor calculates a price that includes all their costs,” the spokesman said. Like the other companies mentioned, Siemens also refrained from commenting on the specific deals in this article, but said that price disparities could reflect  ancillary costs and terms, such as warranties, room preparation, special training courses for hospital employees, and other equipment. “The actual scopes of delivery often significantly exceed the scope given in the tender books,” the spokesman said.

However, scopes of supply that 100Reporters has seen for CT machines in the US show all such additional costs are included on the invoice – and yet the overall price remains at the standard market value, often $1 million to $2 million lower than the same machines cost in China. Moreover, other public tenders show that room preparation – usually cladding a CT room with radiation shielding – is generally contracted out separately to other companies, and has nothing to do with the sale price of the machine.

By way of comparison, a bid from May 2019 shows a GE Signa Pioneer was purchased directly without using a reseller by the Affiliated Hospital of Chengde Medical College, including warranty and freight expenses, for just ¥17.6 million, or $2.56 million. That’s more than $2 million less than another hospital in Yangchun paid for the same machine in January 2020.

“There are bidding records available which can stipulate the price of extended warranties, installation and construction,” said Liu. “However, there is always a huge chunk that cannot be justified.”

The Chinese hospitals and companies involved in bids mentioned in this article did not respond to detailed questions for this article, and in almost all cases gave no official comment. However, one senior manager at the Shenzhen Gaokaiyue Trading Co. – which made a losing bid to sell a Philips MRI machine to a hospital in Shenzhen province in 2019 – did speak, though he declined to give his name, as he felt the information he was offering was “sensitive” and wanted to be able to speak freely. He said that though final prices for equipment could differ from US market prices, depending on “varied features and configurations” in China, “the actual price should not be 80 percent more or even double than the net price in the States.”

Contrary to what both GE and Siemens spokespeople claimed, the Gaokaiyue manager also said that it was in fact routine for manufacturers’ employees to be involved in a reseller’s bidding process. He said “every manufacturer’s salesman will represent the company” in meetings to explain the medical devices for clients during the bidding process, and added that management level officials from manufacturers were also occasionally on hand, depending on the region and the brand of the equipment.

That account is also backed up by Chinese court cases released in the past year, in which witnesses testified that employees of both GE and Siemens were directly involved in the bid-rigging schemes. In one verdict, released in September 2020, a hospital president convicted of taking bribes from 2004 to 2017 testified that a Siemens business manager offered to pay him ¥2 million ($300,000) in 2011 in exchange for help ensuring Siemens products win the bids. In another verdict against a corrupt hospital president, released in July 2020, a third-party reseller testified that a GE regional manager was not only complicit in a 2011 bid-rigging scheme but “would be responsible for taking the GE authorization letter and making the bidding submission.”

SEC Tightens Watch

In recent years, the US Securities and Exchange Commission (SEC) has been more aggressive about scrutinizing the way multinational medical suppliers work with resellers, in a bid to enforce the internal control provisions stipulated by the Foreign Corrupt Practices Act (FCPA).

The FCPA Blog reported in 2018 that the US medical technology firm Stryker agreed to pay a $7.8 million fine following SEC charges that Stryker failed to vet its distributors as they set up conspiracies among a network of sub-distributors. Stryker neither admitted or denied the SEC’s findings.

More recently, Swiss drugmaker Novartis agreed to pay $346.7 million in 2020 to US authorities to settle bribery cases in Greece, Vietnam, and South Korea. Novartis entered a three-year deferred prosecution agreement with the SEC in which it accepted that the SEC’s allegations were true.

The SEC is conducting a massive, long-term probe into bid-rigging in various regions involving Siemens, GE, and Philips, according to a source familiar with the inquiry. The SEC will not comment on the existence of ongoing investigations, but in Philips’ recent filing to the SEC, published in February 2021, the company acknowledged that it has been cooperating with an SEC and DOJ inquiry into “tender irregularities in the medical device industry in certain other jurisdictions…These interactions are ongoing and focus primarily on a number of compliance findings that the company is addressing in China and Bulgaria.”

In a statement, Philips would not go any further than this, but a spokesperson said, “[E]veryone in Philips and its business partners is expected to always act with integrity. Philips rigorously enforces compliance of its General Business Principles throughout its operations.” Like GE, Siemens, Canon, and Medtronic, Philips declined to answer specific questions about the deals mentioned in this article.

Business Principles throughout its operations.” Like GE, Siemens, Canon, and Medtronic, Philips declined to answer specific questions about the deals mentioned in this article.The Organization for Economic Co-operation and Development (OECD) and other authorities have also warned about the increased threat of corruption during the coronavirus pandemic.

“There is growing demand in the health and pharmaceutical sectors, and we know that by their nature, those sectors are prone to corruption in normal times,” said Patrick Moulette, head of the Anti-Corruption Division in the OECD Directorate for Financial and Enterprise Affairs. “The markets are very lucrative, there’s a lot of money here, and in the context of high demand, the risk of corruption can only be higher.”

Moulette did not comment on the specific companies and deals mentioned in this article, but noted that “high prices might be regarded as red flags by compliance officers.”

Major medical tech multinationals have acknowledged that the past year has been a good time for the medical imaging business, with all three companies ramping up production to meet growing demand worldwide. At the same time, the bidding documents also show that inflated prices persist over several months and years — in other words, the newer bids are not a result of increased demand amidst the pandemic leading to higher prices.

Court Cases

Inflated bids share one distinction: the use of resellers, many of them distributors overseen by China’s state-owned Sinopharm, and directly controlled by the government.

This often accounts for the conspicuous differences in sales prices even within China, underscoring that prices are not automatically inflated in the Chinese market. In other words, it is possible for Chinese hospitals to pay fair prices in line with US and European markets.

For example, the Southwest Medical University in Sichuan Province bought a Siemens Magnetom Prisma for ¥35.96 million, or $5.1 million, from a reseller named China Resources Fujian Pharmaceutical. The Magnetom Prisma is one of Siemens’s most advanced MRI machines, but it is not worth that much; other hospitals in the US and China are able to buy such machines for less than half that price. Indeed, a Beijing institute for neurosurgery purchased the same machine directly from Siemens for just $2.1 million – nearly $3 million less than what the Sichuan hospital paid just four months later, in August 2019.

Questioned about the sale, China Resources Fujian Pharmaceutical said that “the price of goods, design fee, packaging fee, transportation fee, loading and unloading fee, installation and commissioning fee, free maintenance service fee during the warranty period, spare parts and taxes” accounted for the $3 million price difference. The company added that it had acted “strictly in accordance with” all “bidding and tendering laws and regulations.”

A recently-released court verdict lays out some extraordinary details of how a conspiracy to inflate prices functions among surrogate bidders. In December 2019, the People’s Court of Jingxiu District, in Hebei Province, convicted 11 employees of such distributors for “collusive bidding” over the sale of high-end medical devices in 2013. In one deal, the defendant, a general manager of one trading company, was found to have called two other companies to file bids, and then “unified the bid price” and even “produce[d] the bidding documents” of all three companies. He then ordered one of his own employees to pose as an employee of one of the other companies – namely Beijing Sanoqiang Pharmaceutical Foreign Trade Co., Ltd., a Sinopharm subsidiary.

According to the court verdict, Beijing Sanoqiang agreed to lend its qualifications and allow the defendant to participate in the tender under its name in exchange for a bribe. Beijing Sanoqiang is a prized business partner of Siemens in China, having won the German company’s “Five-Star Business Partner” award in 2018 and 2019.

In a statement, a Siemens spokesperson said that Siemens’ business partner management team learned of the company’s bribery conviction in July 2020, and that immediate steps were taken to obtain more details. Siemens subsequently decided to continue its relationship with Sanoqiang because the company had cooperated with the investigation, the salesperson responsible had already left the company in 2014, and because the deals in question did not involve Siemens products.

In China, such distributors and surrogate bidders have long been considered a potential source of corruption, but multinationals tend to look the other way, said Yingqi Tan, co-author of a paper in the Pacific Basin Law Journal on pharmaceutical corruption in China. Tan said that multinationals organize sales to cover their tracks, rather than to avoid corruption outright.

As Tan describes it, distributors typically make initial contact with physicians to “test the water,” then return to the multinational to explain that they might need more money for extra costs. “And then the multinational will have a choice to say: Yes or no. They might say: ‘Your business, your problem, I don’t want to know.’ Sometimes they will say, `ok.’”

This account is backed up by testimony in a Beijing Chaoyang District People’s Court judgment, released in 2018, which spells out exactly this scheme: Dong Mou, head of an imaging department at a Beijing hospital, told the court, “The hospital will definitely tell the bidding company in advance about its purchase intention. Bidding is just a procedural process that can make the procurement process legal and compliant.

 

Familiar Terrain

Siemens has itself often boasted of, and has been celebrated for, tightening its compliance system in the wake of the 2008 bribery scandal, in which the German company pleaded guilty to criminal violations of the record keeping and internal control provisions of the Foreign Corrupt Practices Act. As part of that settlement, Siemens paid a record $1.6 billion fine and was ordered to appoint a monitor and produce yearly reports, which the SEC and Justice Department have kept entirely from the public eye until now. (See Part II of this series.)

Nevertheless, vetting intermediaries is a basic task of multinational compliance departments, especially in countries like China, which carry a high-risk of corruption. In fact, Siemens’s own 2021 business conduct guidelines brochure lists “high prices … or unduly high profit margins” as red flags that need to be questioned and clarified.

The involvement of international firms in bribery in China is hardly new, said Kelly, of Radical Compliance.

“China is high-risk. Period,” he added.

“Every single transaction with a government-owned business is high-risk. Period,” he said. “Every compliance officer knows that. So every compliance officer should be thinking about these transactions and understand that they need an extra level of review.”

This series was produced in partnership with the McGraw Center for Business Journalism at the Craig Newmark Graduate School of Journalism at the City University of New York, and co-published with the Associated Press.

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