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China detains 200 hospital heads in anticorruption campaign

China is carrying out a massive anticorruption purge across its healthcare sector, in an effort to bring down medical costs and revive the country’s flagging economy.

Communist Party enforcers have steamrolled through hospitals and medical institutions across China, detaining more than 190 hospital party chiefs, directors and deputy directors—incumbent and former—so far this year, according to a Wall Street Journal review of government disclosures. A retired provincial party chief, who held a top government role overseeing healthcare reforms from 2010 to 2015, was detained in late August for allegedly committing “severe violations of discipline and law”—a euphemism for corruption.

The campaign has spooked investors. The CSI 300 healthcare index, which tracks China’s largest drugmakers and medical-equipment companies, has fallen 15% so far this year, far outpacing the 3.5% decline on the broader CSI 300 index.

The party has targeted corruption in its healthcare industry in the past, but this year’s campaign has been particularly forceful, echoing recent crackdowns on internet giants and the after-school tutoring industry that have altered swaths of the economy.

One Chinese state-run newspaper said the number of top hospital administrators taken into custody this year is already more than double the total detained in all of 2022.

Concerns over healthcare graft in China have buffeted foreign pharmaceutical firms as well. In August, a former employee at Pfizer filed a lawsuit in California against the U.S. drugmaker alleging that the company dismissed him after he raised compliance concerns related to its spending on officials in China, which Pfizer denies.

The purges come with China’s economy limping into a new era of slower growth and the leadership scrambling to get people spending more money. Attacking corruption is one way to lower healthcare bills, a source of anxiety for Chinese families that encourages them to save rather than consume, said Xi Chen, a Yale University associate professor who studies health policy and economics.

Healthcare experts say the campaign also serves Chinese leader Xi Jinping’s pledge to deliver “common prosperity”—a slogan widely seen as a commitment to steer China closer toward an egalitarian ethos that had prevailed in the early decades of Communist rule under Mao Zedong.

Beijing has long sought to combat rising costs in housing, education and healthcare—often described in China as the “three big mountains” that contribute most heavily to many households’ living expenses, and which economists say have exacerbated wealth inequality, weighed on consumption and dragged down birthrates.

More than 95% of China’s population has basic health insurance, but it offers only bare-bones coverage. About one-third of healthcare spending in China was paid out of pocket in 2020, the latest year for which World Health Organization data is available. That was about three times the share that Americans paid.

“Chinese leaders understand when people do not have affordable healthcare, it will threaten social stability,” said Winnie Yip, a Harvard professor and an expert on Chinese health policy.

The National Health Commission and the Communist Party’s top disciplinary agency didn’t respond to queries.

Academics who study China’s healthcare industry say it has grown rife with corruption due to weak oversight and financial pressure on poorly funded hospitals that pushes doctors and administrators to take bribes to pad their incomes and bring in more revenue. Patients sometimes make informal payments, colloquially known as “red envelopes,” to physicians in return for access to faster or higher-quality treatment.

High profit margins in pharmaceutical sales have also impelled graft. Drugmakers often pay kickbacks to doctors to persuade them to prescribe more of their products.

Covid-19 increased the financial pressures on Chinese hospitals, which had to give priority to pandemic controls over income-generating services. According to the National Health Commission, 43.5% of China’s top-tier public hospitals were in the red in 2020, more than double the 2019 rate.

Authorities have highlighted the case of Zhu Zhaomin, the director of a county-level medical center on the fringes of the inland megacity of Chongqing. In the five years before he came under investigation in March, Zhu accepted meals, “red envelopes” of cash and other gifts offered by unscrupulous entrepreneurs, for whom he reciprocated with favors to benefit their businesses, according to an official accounting of his case.

The county’s health authority ordered cadres to watch a video of Zhu confessing, after which three officials turned themselves in for their own wrongdoing, while another 26 people voluntarily handed in nearly a million yuan, equivalent to about $138,000, in improper payments that they had taken, the account said.

In June, local authorities said they expelled Zhu from the party and would hand his case over to prosecutors. The party and state disciplinary commissions in Fengdu county, which investigated Zhu, didn’t respond to requests for comment and to relay queries to Zhu.

While investigators have been rounding up medical professionals for months, the central government announced in May a dedicated drive to “correct unhealthy trends” in medical procurement and services, including the use of bribery, kickbacks and leaking of tender information to rig bids and arrange drug and equipment purchases at inflated rates.

Beijing followed up two months later by launching a formal yearlong campaign in July to clean up healthcare corruption.

Some regions have reported early results. Authorities in the central province of Shaanxi said that, from January to early August, they had investigated 2,371 medical corruption cases, “dealt with” 937 people and tracked the refunding of more than 3,400 “red envelopes” to patients and their families. The party-disciplinary agency in the southern province of Guangdong reported how one local hospital saw average outpatient and inpatient fees between January and May fall by 16.6% and 21.4%, respectively, compared with the same period in the previous year, after its former director was purged for corruption in late 2022.

A study led by Peking University assistant professor Fu Hongqiao, which reviewed more than 3,500 healthcare-related criminal cases between 2013 and 2019, found that bribery accounted for about 68% of convictions. About 80% of bribe-takers were healthcare providers, and most bribe-givers were suppliers of pharmaceuticals, medical equipment and consumables.

In the Pfizer case, the former employee alleged the company spent $168 million on “potentially influential government officials” in China between the second quarter of 2019 and the third quarter of 2021, more than 10 times what Pfizer spent on such officials in other countries during that period.

Pfizer has sought to have the suit dismissed. In an annual securities filing in February, Pfizer said it received requests in 2020 from Foreign Corrupt Practices Act units at the U.S. Justice Department and Securities and Exchange Commission seeking documents relating to the drugmaker’s China operations, which the company provided.

Pfizer said the former employee’s claims of retaliation were “entirely unfounded” and the company intends to defend itself. The Justice Department declined to comment, while the SEC said it “doesn’t comment on the existence or nonexistence of a possible investigation.”

The root of the healthcare corruption in China, which the current crackdown doesn’t address, is the meager support hospitals get from the government, which creates “a very strong incentive to increase their revenue, to overtreat and overdiagnose,” Yale University’s Chen said.

A far-reaching crackdown can create its own problems even as it solves others, Chen and other healthcare experts said. They include hurting the morale of doctors and healthcare workers, and deepening mistrust between patients and doctors, which has been known to explode into violence.

Without structural changes to the healthcare system, including higher pay for doctors, any savings that result from the corruption crackdown will eventually evaporate, said Yip, the Harvard professor.

“If hospitals and physicians cannot take kickbacks, they will find other ways to make profit and costs will continue to be high,” she said. The Wall Street Journal

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