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China launches ‘unprecedented’ crackdown on its healthcare industry amid economic woes

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China has launched a sweeping anti-corruption campaign targeting its hospitals, pharmaceutical industry and insurance funds as it grapples with mounting economic challenges and long-standing public frustration about high costs in the behemoth health care sector.

More than 180 hospital leaders, including Communist Party secretaries and hospital heads, have been put under investigation so far this year, according to state agency China News Service, with at least 10 of those voluntarily surrendering since June.

That’s more than double the number of such cases last year, according to other state media reports.

Reports and rumors about the campaign have dominated local headlines and social media in recent weeks, with state news agencies broadcasting examples.

One involved the president of a small hospital in southwestern Yunnan province alleged to have skimmed more than $2.2 million off the purchase of a medical device for cancer treatment in a 2021 case recently highlighted by anti-graft officials.

Multiple provincial-level departments have come on board with the crackdown, which was publicly launched by 10 national agencies last month – a remarkable level of coordination for such a campaign, even within a decade of anti-corruption efforts under Chinese leader Xi Jinping.

Some areas have set up hotlines for phoning in tips about corruption in the sector, according to state media. Shanghai earlier this summer launched a system of cash rewards for reporting illegal activities under the purview of its market supervision agency – with the number of investigations in the health care sector nationwide expected to grow further in the coming months.

“The speed at which local governments carried out probes, and the severity of penalties meted out, are impressive,” Ren Jianming, head of the Center for Integrity Research and Education at China’s Beihang University, told state media.

At least one state media report has described the campaign as “unprecedented in the depth, breadth and intensity” of targeting the health care sector.

Experts agree the campaign is China’s most far-reaching effort to date to address what is widely seen as an entrenched issue within an industry where cost has a direct impact on the well-being and household budgets of Chinese families.

Beijing has not said why it has chosen to ramp up its efforts now, and experts have questioned whether cracking down on corruption will address systemic issues fueling the problem.

But the campaign comes amid growing public concern over China’s economic slowdown and rising unemployment and the government is under pressure to respond to public grievances and stimulate growth.

Targeting graft in the sector has the potential to bring down health care costs, as well as divert public attention from other problems and redirect blame for issues plaguing the sector. It can also enable debt-strapped local governments to gather sorely needed funds as they emerge from three years of costly Covid-19 controls.

China’s health care system has long been rife with accusations of hospitals over-prescribing treatments to inflate bills or taking kickbacks from pharmaceutical representatives to procure and prescribe overpriced medicines, which in China are distributed at in-house pharmacies.

Despite wide health insurance coverage, absolute costs of health care can be a heavy burden for many in China. Hospitals are the front line for these issues, as they generally take on a role that might be served by a primary care physician in other countries like the United States, in addition to other services.

Concerns about health care costs spilled onto the streets earlier this year as elderly residents in at least two cities gathered to protest changes to their insurance coverage.

And the burden of health care costs on families – and the system – is only expected to rise as China’s population ages.

Anti-corruption efforts may be one way to address issues of affordability, according to Yanzhong Huang, a senior fellow for global health at the Council on Foreign Relations in New York.

But it also sidesteps more urgent reforms of the public health system, and shifts focus away from the government’s own responsibility – at a time when it may have little ability to fund reform, he said.

Despite the country’s impressive economic growth of recent decades and efforts to improve oversight in the health care sector, experts have long pointed to insufficient funding for public hospitals and low salaries for medical workers as areas that incentivize unscrupulous and profit-driven behavior in hospitals and are in need of reform.

And now China faces slowing economic growth.

“Given the economic slowdown and the shrinking fiscal revenue, the debt-ridden local governments really don’t have the capabilities to invest more in the medical sector and corruption continues to be an issue,” said Huang.

“If you don’t invest in the medical sector … then the people’s dissatisfaction will continue to rise, so they need a scapegoat to solve that problem – medical representatives, hospital managers, doctors are forced to become that scapegoat,” he said.

People wait in the emergency department of a hospital in Beijing amid a surge of Covid-19 cases at the start of the year.

Local governments are under financial stress as they grapple with a sharp drop in revenue amid a property slump, and the lingering effects of budget-draining Covid-19 controls, which were only lifted late last year.

China’s pandemic-era restrictions on movement, like lockdowns, also hit hospitals, shrinking revenue and deepening deficits, according to Xi Chen, an associate professor at the Yale School of Public Health.

“When an industry is in a deficit, usually the most immediate response is to have an anti-corruption campaign, because such a campaign can find funds,” Chen said.

So far, the crackdown appears geared that way.

A number of local governments have recently set up “clean accounts” for health sector workers to turn in illegal gains before the month’s end, according to state media.

In one case last month in southeastern Guangzhou, authorities stood to reap more than $700,000 in fines and confiscated funds linked to alleged bribery.

In focus in the campaign are payments and other perks exchanged between representatives of pharmaceutical companies and hospital administrators or procurement officials, a form of graft which can pass inflated treatment prices on to the consumer, among other issues like the management of medical funds.

Finding ways to lower costs by reducing corruption in a bloated industry could also help free up people’s discretionary income and stimulate spending elsewhere in the ailing economy, experts say.

A medical worker stands beside people lining up for Covid-19 testing at a hospital in Shanghai in 2020.

China’s National Health Commission last week vowed the multi-agency effort would combat “profiteering,” kickbacks and improper use of medical insurance funds.

The campaign would cover the “entire chain of production” across pharmaceutical industry as well as medical institutions and funds, the NHC said in a statement. Late last month, the graft-busting Central Commission for Discipline Inspection underlined the heft of the campaign, holding a video conference calling for stronger efforts in the fight against corruption in the health care industry.

And there are signs the industry is bracing for wide-ranging impact.

The CSI medical services index, which tracks China’s largest listed pharmaceutical companies on the Shenzhen stock exchange, dropped over 5% in the past month as of Thursday amid a sell-off.

At least two Chinese health care companies have also paused initial public offering (IPO) plans amid heightened scrutiny due to the crackdown, Reuters reported earlier this month.

In July, two executives from Chinese pharmaceutical companies, chairman of Shanghai Serum Bio-Technology Fan Zhihe and Winning Health Technology Group’s chair Zhou Wei were placed under investigation, according to stock exchange filings.

But experts have also warned about the potential for the campaign to negatively affect doctors and advances in health care .

In a widely circulated statement, Sun Ningling, a cardiovascular medicine specialist at Peking University People’s Hospital, said she supported anti-corruption efforts, but objected to blanket suspicions about academic conferences, which can provide a platform for medical progress.

Her comments followed local media reports on such conferences being canceled after agencies flagged these events as conduits for drug companies and their representatives to lavish doctors and hospital leadership with gifts and payments.

There have also been concerns that the campaign could stigmatize doctors, a profession that already has a history of facing violence from patients or their families.

Backlash against doctors could dissuade young people from joining the field, which would have a significant impact on health services in China in coming years, experts say.

The NHC appeared to try and address this concern in its recent statement, stressing that “medical workers shoulder the sacred responsibility of saving lives, helping injuries, and maintaining the health of the people.”

“(Their) hard work should be fully recognized,” it said.

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